Sora, interest rate benchmark for home loans in Singapore, drops: What it means for homebuyers in 2025

If you've been keeping an eye on mortgage rates, you may have noticed a recent dip in the Singapore Overnight Rate Average (Sora). Since this rate serves as a benchmark for home loans, any movement can influence how much you pay for financing your property.

With rates easing, homebuyers and upgraders might be wondering whether this is the right time to make a move. But what's behind this trend, and how might it affect the property market?

Drop in money-market rates

On March 13, Sora fell to 2.08 per cent, marking its lowest level since Dec 30, 2022. However, this drop was short-lived. By March 14, the rate had rebounded slightly to 2.24 per cent. Despite this minor uptick, Sora remains significantly lower than its highs in 2023, suggesting that borrowing costs are easing for now.

Factors driving the decline in borrowing costs

Several key factors have contributed to lower interest rates.

First, lending activity has slowed, leading to an excess of liquidity in the system. Banks are also seeing higher foreign inflows into fixed deposits, which increases their available cash reserves.

Additionally, the resilience of the Singapore dollar has helped maintain a favourable cash environment, further reducing the pressure on interest rates.

MAS's monetary policy shift and unexpected market response

In January 2025, the Monetary Authority of Singapore (MAS) adjusted its Singapore dollar policy for the first time since 2020, adopting a looser stance. Typically, a weaker currency would lead to higher interest rates, as investors seek greater returns to offset currency depreciation.

However, the expected rate hikes did not materialise. Instead, borrowing costs have continued to fall, surprising analysts who had anticipated a different outcome.

Strength of the Singapore dollar in 2025

Despite MAS's policy shift, the Singapore dollar has remained strong, outperforming most Asian currencies. This strength has played a role in keeping borrowing costs low. The relative stability of the renminbi has also helped anchor regional currencies, indirectly supporting Singapore's economic conditions.

Liquidity conditions and loan-to-deposit ratio

According to OCBC's Frances Cheung, Singapore dollar liquidity remains high as investors continue to hold confidence in the currency's long-term appreciation.

This sentiment is reflected in the loan-to-deposit ratio, which fell from 70.5 per cent at the end of 2023 to 68.2 per cent in January 2025. With banks holding more deposits than loans, liquidity remains ample, contributing to the lower interest rate environment.

How lower Sora interest rates could impact property demand

Lower borrowing costs often translate to increased property demand. In previous cycles, when interest rates fell to ultra-low levels — such as in 2019 — transaction volumes surged.

At that time, some banks offered mortgage rates as low as 0.5 per cent to 0.6 per cent for fixed periods of three to five years. However, by 2022 and 2023, rates spiked to around five per cent, significantly increasing mortgage costs.

This pattern suggests that as interest rates drop, more buyers may enter the market, pushing up transaction volumes. When demand rises, sellers often raise their asking prices, potentially driving property prices higher. With Sora now at its lowest level in over two years, some analysts believe that a similar trend could emerge.

Recent months have already shown a rise in home upgrading activity. Many HDB owners have moved into private homes, with strong sales recorded in new launches, resales, and integrated developments in early 2025.

The decline in borrowing costs has likely played a role in this shift. Additionally, as interest rates approach the HDB concessionary loan rate of 2.60 per cent, more buyers might find private housing a more viable option.

A spike in million-dollar HDB transactions was also observed in January 2025. Since many high-end HDB buyers rely on bank loans, lower interest rates mean reduced monthly repayments, making it easier for them to afford pricier properties.

Looking ahead, this trend could continue — but it's important to monitor how Sora moves in the coming months. Although rates dipped to 2.08 per cent in mid-March before rebounding slightly, further fluctuations could impact buyer sentiment.

While lower interest rates make home purchases more attractive, some caution is still advised. Instead of rushing into the market, you might want to observe how financing conditions evolve before making a decision.

Potential government intervention to prevent market overheating

However, if transaction volumes rise too quickly, policymakers may introduce new restrictions to maintain market stability.

With lower borrowing costs making home purchases more attractive, some analysts caution that the government might step in with cooling measures if the housing market shows signs of overheating. Past measures have included tighter loan-to-value (LTV) limits and additional stamp duties to curb speculative buying.

Buyers should stay informed about potential regulatory changes before making purchasing decisions.

This article was first published in 99.co.