Home loans: From Sibor to Sor to Sora, here's what homeowners should know

Home loans in Singapore used to be priced following one of three interest rate benchmarks. These are the Sora, Sor and the Sibor.

Soon, Sora will be the sole interest rate benchmark used in Singapore, and since 2021, lenders have already begun phasing out Sor and Sibor home loans, leaving Sora loans in their wake.

This means that if you’re looking for a mortgage loan, your choices will be narrowed down to Sora loans only, making for less analysis paralysis.

But what if you have an existing home mortgage that was based on Sor or Sibor? The short answer is "nothing" for Sor, and "look for a new mortgage" for Sibor.

We’ll explain in detail later, but first, let’s unravel what all these acronyms mean and what they are.

Understanding interest rate benchmarks in Singapore

What is Sora?

The Singapore Overnight Rate Average, or Sora, is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market.

In other words, it is based on the interest rates changed by banks on unsecured loans made to one another after the close of the business day. This overnight borrowing among banks is aimed at maintaining reserve requirements, with banks with surplus cash lending to banks with shortage of funds.

The Sora is administered by the MAS, which had been publishing the rate since July 2005. It is underpinned by a deep and liquid overnight interbank funding market, and because it references the compounded average, is considered to be more stable than forward-looking term rates, such as the Sor.

That’s to say, Sora, being based on past interbank transactions, is less volatile than forward-looking benchmarks, which are based on rates banks are expecting.

As mentioned, the Sora will remain as the key interest rate benchmark in Singapore moving forward.

What is Sor?

The Singapore Dollar Swap Offer Rate (Sor) is an interest rate benchmark based on the effective rate of borrowing SGD "synthetically" by borrowing USD then swapping to SGD on the forex market.

The Sor has been phased out because its computation relies on the USD Libor. However, the latter has been dropped following the announcement by the UK regulatory authorities that the benchmark will not be sustained by regulatory powers after end-2021.

Hence, there are no more Sor home loans being offered, and homeowners are unlikely to encounter them any longer, with Sora loans taking their place.

What is Sibor?

The Singapore Interbank Offered Rate (Sibor) is pegged to the interest rates for unsecured loans on the Singapore interbank market. It is based on up to 20 different bank rates, with the top and bottom quartile rates trimmed, and the remaining rates averaged arithmetically.

The Sibor is being phased out in stages, with the final deadline set for Dec 31, 2024. Beyond that point, Sora will be the only interest rate benchmark in Singapore.

What homeowners need to do regarding the switch to Sora loans

Returning to our question of what homeowners should do, let's take a look at three possible scenarios.

Scenario 1: You are looking for a home mortgage

As explained, the interest rate for your home loan packages will be based on Sora only, There won’t be anymore Sor or Sibor-linked loans.

You will still be able to choose between fixed-rate mortgages or floating-rate mortgages, depending on the lender. You may also see interest rates pegged to one-, three- or six-month compounded Sora for different loan packages.

Scenario 2: You have a Sor-based mortgage

Technically, there’s nothing you should need to do because your lender would have already contacted you earlier this year to switch to a different loan package.

Usage of the Sor was dropped on June 30, 2023, and you should already be sitting pretty on a brand new mortgage loan by now.

Hence, you would only need to carry on with your new, non-Sor loan. Or you might be on the lookout for a better mortgage package.

Scenario 3: You have a Sibor-based mortgage

If you are currently servicing a Sibor loan, you should start looking at alternatives right now.

You basically have three options:

• Option 1: Switch to an alternative loan package offered by your bank
• Option 2: Enrol into the Sora Conversion Package at the spot spread before April 30, 2024
• Option 3: Wait to be converted to the Sora Conversion Package in June 2024 at the historical spread

The Sibor will ultimately be removed from use by the end of next year. In preparation, banks will convert all Sibor-based home loans to the Sora Conversion Package (SCP) at the historical median spread in June 2024.

If you rather not wait till then, you can opt to be enrolled into the SCP before April 30, 2024. Or, as per Option 1, you can simply switch to another loan package altogether.

What is the Sora Conversion Package (SCP)?

The SCP allows existing Sibor-based home loans to be converted to Sora loans with no extra fees and no additional lock-in period. Note the following:

• No change to existing Sibor loan margin
• Rate based on three-month compounded Sora
• Adjustment spread will be added to account for the difference between Sibor and three-month compounded Sora

Differences in adjustment spread

Depending on the timing of your SCP conversion, one of two adjustment spreads will be applied, as follows:

• Sept 1, 2023 to April 30, 2024: three-month Compounded Sora + your existing Sibor loan margin + Adjustment Spread (spot-spread)
• June 2024 (automatic conversion): three-month Compounded Sora + your existing Sibor loan margin + Adjustment Spread (historical median)

Whether there will be any difference (or how big the difference might be) between the spot-spread and the historical median will depend on the volatility of interest rates from now till then.

ALSO READ: Should you get a fixed home loan or a floating home loan?

This article was first published in ValueChampion.