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It’s not every day that mortgage interest rates make the news.
This year though, there has been some buzz about SORA (Singapore Overnight Rate Average), which is replacing SOR (Singapore Dollar Swap Offer Rate) and SIBOR (Singapore Interbank Offered Rate). In fact, banks have already stopped offering floating rate property loan packages based on SOR and SIBOR and have switched to using SORA.
Those with existing residential and commercial property loans should take note of and understand the banking industry’s transition to SORA, which will be fully completed in two to three years.
To make this “homework” easy for you, we have put together a simple guide on what the SORA transition means for home and commercial property owners with existing property loans.
We will also let you know your next steps, depending on what your current property loan type is.
About the SIBOR/SOR to SORA transition
In the past, banks in Singapore commonly used one of the two benchmarks to determine their mortgage interest rates for floating rate loan packages. This typically comprised the reference benchmark and a customer margin, as follows:
| All-in-rate of loan package (A) | Reference benchmark (B) | Customer margin (C) |
| SOR-pegged loan | e.g. 3-month SOR | 1.00% p.a. |
| SIBOR-pegged loan | e.g. 1-month SIBOR | 0.75% p.a. |
Thus the all-in-rate faced by a borrower would be: (A) = (B) + (C)
Both SOR and SIBOR are administered by a regulated benchmark administrator, ABS Benchmarks Administration Co. The rates are publicly available, so consumers like you and me can look them up when calculating our interest rates.
However, both SOR and SIBOR will soon be discontinued. In line with global best practices, the Singapore banking industry is working to transition from SOR and SIBOR to SORA, a more robust, reliable and transparent interest rate benchmark.
The transition to SORA is being overseen by the Steering Committee for SOR & SIBOR Transition to SORA, or SC-STS, a dedicated industry committee established by the Monetary Authority of Singapore (MAS).
Are you one of those affected? We lay out the next steps you can take as follows.
What to do if you have a SOR-pegged loan
As SOR will be discontinued after 30 June 2023, borrowers with existing SOR-pegged loans will need to convert their mortgages to another property loan type in the coming year.
The simplest option is the SORA Conversion Package, which will be offered by all retail banks in Singapore and made available to existing SOR-pegged property loan borrowers. It will be available from 1 September 2021 to 31 October 2022.
The SORA Conversion Package switches a borrower’s existing SOR loan to a comparable SORA loan, while minimising differences in interest payments at the point of conversion. It does so by applying an adjustment spread, known as the Adjustment Spread (Retail), to the existing SOR loan margin. This spread, which is published monthly on the SC-STS website, reflects the average difference between the relevant SOR benchmark (e.g. 3-month SOR) and 3-month Compounded SORA over the last three months.
The Adjustment Spread (Retail) is necessary when converting a SOR-based loan to a SORA reference, because SOR factors in a term and credit risk premium while SORA does not, which results in SORA typically being lower than SOR.
| Before (SOR loan) |
After (SORA Conversion Package) |
|
| Reference Rate | 1-month SOR, 3-month SOR; or 6-month SOR |
3-month Compounded SORA |
| Customer Margin | Your existing SOR loan margin | Your existing SOR loan margin + relevant Adjustment Spread (Retail) |
In short, with the SORA Conversion Package, you can switch your existing SOR-pegged property loan to a comparable SORA-pegged property loan completely free of charge. To smoothen the transition, SC-STS has also recommended that banks provide this conversion to customers with no additional fees or changes to your lock-in period.
You should be receiving a letter from your property loan provider on the SORA Conversion Package soon. From there, all you need to do is follow up with your bank’s representative.
Another option is to shop around for a new property loan, which you can do easily on MoneySmart. This process is called refinancing (if you switch to another bank) or repricing (if you settle on a new package with the same bank).
This option involves comparing the different loan packages available on the market and switching your mortgage to a new package. However, do note that in this case, fees and lock-in periods would typically apply.
You can also choose from a wider variety of loan packages, not just your bank’s SORA-pegged property loan.
You will want to explore your options early and keep an eye out and check if you can benefit from lower interest rate packages that are being offered in the market!
What to do if you have a SIBOR-pegged loan
If you have a SIBOR-pegged property loan — there is no need to take action just yet as SIBOR will be only discontinued after 31 December 2024.
However, we do expect that SIBOR loan holders would similarly be required to switch out of their SIBOR-pegged property loans in a couple of years, where SORA will be one of the options. So, we recommend that you start learning more about SORA in the meantime. That way, you can be mentally and financially prepared for the transition.
Although there is no urgency for you to switch mortgages just yet, you can certainly do so if your current property loan’s lock-in period has ended and you have found a suitable new mortgage to switch to.
For a start, head here to learn more about the backstory behind the SORA transition and to find out how SIBOR compares against SORA.
After learning about the differences, you can also compare the SORA-pegged property loans on the market.
You can kick start the refinancing or repricing process on MoneySmart — our brokers will guide you every step of the way.
Making your mortgage transition fuss-free
Rest assured that the SC-STS’ role is to coordinate between MAS, the Association of Banks in Singapore (ABS), relevant industry associations, as well as key banks, to ensure a smooth transition over the next few years.
To make the transition more seamless, SOR loan borrowers converting to an alternative loan package within the same bank will not have to undergo a new total debt servicing ratio (TDSR) assessment. This is a one-time exception granted by MAS to facilitate borrowers’ switch to replacement loan packages offered by their banks. For folks that are considering switching to an alternative loan package with other banks, you should also check if there are any other TDSR exemptions that apply to you (e.g. borrowers who are owner-occupiers are exempted from TDSR when refinancing their property loans).
As consumers with so much information and tools at our disposal, we should take charge of our finances and explore the options ahead of time.
Reach out to your bank to find out more.