SIBOR, SORA and SOR rates explained - how they affect your home loans

One of the biggest decisions you have to make when buying a home is… no, not what colour you want the walls to be, but what home loan to go for.

The interest rates of floating rate home loans are usually pegged to the SIBOR (Singapore Interbank Offered Rate). When the SIBOR rises, your home loan interest rate rises too, and your wallet screams in pain as you fork out more for your home loan repayments that month.

In July 2020, a consultation involving the Association of Banks in Singapore proposed that the SIBOR be phased out in three to four years and replaced by the SORA (Singapore Overnight Rate Average).

This announcement comes not long after the use of SOR (Swap Offer Rate) was phased out for home loans. SOR is another benchmark to which many home loan interest rates used to be pegged. Since 2017, banks have stopped offering home loans pegged to SOR.

This will affect present and future home owners considering a floating rate home loan package. 

SIBOR vs SOR vs SORA — What are the differences?

SIBOR, SOR and SORA are all interest rate benchmarks. In short, banks use them to determine how much interest to charge or to pay out.

Such interest rate benchmarks fluctuate on a day-to-day basis. So, having your interest rate pegged to them means it will constantly change, too.

Some benchmarks can also be averaged out over a longer period. For instance, if your home loan interest rate is pegged to the 3-month SIBOR, it means it will be charged according to the average SIBOR over a period of 3 months. It will thus fluctuate once every 3 months.

What is the Singapore Interbank Offered Rate (SIBOR)?

SIBOR is currently the most common benchmark to which home loan interest rates are pegged.

Like SORA, SIBOR is pegged to interest rates charged by banks to other banks wanting to borrow money on the Singapore interbank market.

Where SIBOR differs is in how it calculates this rate. The rates of the 20 banks are ranked and the top and bottom quartiles are removed. The remaining banks’ rates will be averaged to get SIBOR.

SIBOR is currently the most common benchmark to which home loan interest rates are pegged, and if you’re currently repaying a floating rate mortgage it’s almost certain that your interest rate is pegged to SIBOR.

Once the proposed changes take effect, it will be supplanted by SORA.

What is the Swap Offer Rate (SOR)?

SOR is a benchmark pegged to the spot and foreign exchange rates of the USD and SGD. As far as home loans are concerned, it is more or less obsolete, as those who previously had SOR home loan packages have since seen their loans converted to SORA packages.

It measures the cost of borrowing USD and then converting it to SGD through an FX swap, which is a financial product that enables you to exchange currencies, usually in order to get better interest rates.

Until 2017, SOR was one of the major alternatives to SIBOR. It was also used in combination with SIBOR to determine interest rates in some home loan packages.

As you can imagine, SOR is very dependent on the US economy and tends to be more volatile than SIBOR, although it generally trends in the same direction as SIBOR.

Given the uncertain future of the US economy in this pandemic, it’s probably a good thing home loans are no longer pegged to SOR.

What is Singapore Overnight Rate Average (SORA)?

SORA is quite similar to SIBOR in that it also measures the Singapore interbank lending rate for unsecured loans — the interest rate banks charge other banks who are taking out unsecured loans from them.

However, SORA offers more transparency, as it is based on the average rate of all interbank lending transactions.

Compared to SIBOR’s convoluted method of ranking banks and then removing the top and bottom quartiles, SORA’s method is way simpler.

Shifting from SIBOR to SORA — What’s involved?

SORA tends to be more predictable and more stable than SIBOR. One reason is that SORA is backward-looking, while SIBOR is forward-looking.

What does that even mean?

Well, SORA measures the volume-rated average of past interbank transactions that have already taken place. In other words, you always know what to expect next month if you bother to check what happened in the past month.

SIBOR, on the other hand, reflects the interest rates that banks have decided to charge in the future. So, it is more unpredictable as banks can hike up or drop interest rates without warning.

The predictability of SORA is even more evident when it comes to the 90-day SORA, which future home loans are likely to use. This is determined based on the SORA for the past 90 days.

By contrast, the 3-month SIBOR (which is what many mortgage interest rates are pegged to right now) is based on the interest rates banks will be setting 3 months into the future, which is much scarier as you can get hit by unexpected interest rate hikes.

All that being said, many banks have not yet started rolling out SORA home loan packages. OCBC launched Singapore’s first SORA home loan package last month.

So in practice, we don’t yet know if these SORA packages will generally work out to be cheaper than the existing SIBOR ones. Historically speaking, SORA tends to be lower than SIBOR, but it remains to be seen how much of of a spread (ie. mark-up) banks will tack on to the rate.

If you hate your current SIBOR home loan with a passion, consider refinancing later this year to a SORA home loan package. Otherwise, as was the case with SOR home loan packages in the past, it is likely that over the next 3 or 4 years, many existing SIBOR packages will get converted to SORA ones.

And if you’re thinking about buying a home soon, you’ll be a little more informed when the bank representative mentions SORA!

This article was first published in MoneySmart.