Banks to Replace SIBOR/SOR with SORA — Could This Actually Benefit You?

Home Loan Singapore - SIBOR SOR transitioning to SORA

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If you’re an existing or potential homeowner in Singapore, you may have heard the news that there’s a new type of property loan package in town.

These new property loan packages are based on SORA (stands for Singapore Overnight Rate Average). SORA will replace SOR and SIBOR, the interest rate benchmarks that homeowners are currently familiar with.

You can rest assured that the new interest rate benchmark is meant to provide a better option for us consumers, not to complicate financial matters in our lives.

We’ll explain what the transition to SORA is all about and how it will benefit us.




SORA (Singapore Overnight Rate Average) is an interest rate benchmark that will be replacing the following used by banks to determine interest rates in floating rate property loan packages:

  • SOR (Swap Offer Rate)
  • SIBOR (Singapore Interbank Offered Rate)

Simply put, SOR is based on the cost of borrowing US dollar (USD) and then converting it to Singapore dollar (SGD), while SIBOR is based on the interest rates at which banks expect to borrow from one another.

Both SOR and SIBOR are in some ways associated with an international benchmark, LIBOR (London Interbank Offered Rate), which is in the process of being phased out. LIBOR has shown itself to be vulnerable to manipulation. This happened in 2012, when several international banks colluded to manipulate the LIBOR. Strict enforcement action was taken against those banks.

Given this history, global authorities have been working together with banks to move away from the use of benchmarks such as LIBOR, SOR and SIBOR.

In Singapore, SOR, which relies on LIBOR in its computation, will be discontinued after 30 June 2023, once USD LIBOR is also discontinued. The Association of Banks in Singapore (ABS) has also decided to phase out SIBOR in the next two to three years.

As banks move towards using SORA for their property loan packages, here are two ways the transition will benefit homeowners like you.



1. Transparent, robust, and reliable

SORA is based on overnight borrowing transactions by banks in Singapore, and it is administered by the Monetary Authority of Singapore (MAS).

To determine SORA, a group of banks in Singapore is required by MAS to report its data on all eligible transactions on a daily basis. At the end of the day, MAS checks that the banks’ submissions are valid and calculates the average rate (weighted by volume) of all these transactions.

The resulting average rate is SORA, and it is published on MAS’ website at 9am the following day.

SORA is not a new benchmark. SORA has been administered by MAS since 2005, thus consumers can take comfort in knowing that the benchmark is well-established.



2. More stable interest payments

In addition to its superior quality as an interest rate benchmark, SORA-linked property loans tend to have more stable interest payments compared with SOR- and SIBOR-linked loans.

Loans based on SIBOR and SOR generally use a single day’s reading for each interest payment period, and thus are exposed to ‘pin risk’ – in other words, the risk of abrupt fluctuations on a single day affecting the interest for the next loan repayment period.

However, with SORA, banks typically use the 3-month compounded SORA rate to price their property loans. This means that while SORA is calculated on a daily basis, banks actually use the average SORA rate over the past 90 days, which tends to be more stable, to price their property loans. Thanks to this, SORA-based property loans will only reflect interest rate changes over subsequent months. That gives you more time to prepare for the changes, mentally and financially.

Should there be any change in the interest rate environment, your mortgage interest payments will not be immediately affected, and changes to your mortgage rates will happen more gradually.

That said, bear in mind that SORA-pegged loans (like all floating rate loans) will be affected by market conditions, so you will still see an eventual adjustment in your interest payments.



Homeowners to benefit from SORA transition

In summary, the introduction of SORA-linked property loans can benefit homeowners in two important ways:

  • First, having been administered by MAS for over a decade, SORA is a transparent, robust and reliable interest rate benchmark. 
  • Second, because banks use the 3-month compounded SORA which reflects the past 90-day average of SORA rather than a single day’s reading to price their property loans, you can enjoy interest payments that are less susceptible to volatility.

So, if you are looking to finance your new home and are open to a floating rate bank loan, you may want to consider SORA-pegged property loan packages now that you know about its benefits.

With the impending switch from SOR and SIBOR to SORA, SOR property loan customers should switch to an alternative loan package early. You should contact your bank for details.

However, SIBOR property loan customers do not need to take immediate action yet as SIBOR will only be discontinued later. Your bank will contact you at a later date.

Regardless, rest assured that the MAS, ABS, Steering Committee for SOR & SIBOR Transition to SORA, as well as banks, are all working together to ensure a smooth transition to SORA, so that our interests are well taken care of.

Reach out to your bank to find out more.