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If you are considering to take up or currently have a floating rate housing loan package from the banks, you should have heard the news – SORA will replace SIBOR in phases. By now, the 12-month SIBOR has already been discontinued. The 6-month SIBOR will be discontinued from end 2021 onwards.
Buying a house in Singapore is not cheap. As an average Singaporean, chances are you will need to apply for a mortgage loan to pay for your big-ticket purchase.
There are usually two main options for your mortgage loan: apply for an HDB loan or a bank loan.
HDB Loan
· Interest rate: Rate is pegged to interest rate of CPF Ordinary Account (Fixed rate of 2.6% for the past 2 decades)
· Down payment: Pay by cash or CPF
· Loan penalty: 7.5% per annum
· Max loan: Resale flat (Market valuation or 90% of purchase price, whichever is lower) or New flat (90% of purchase price)
Bank Loan
· Interest rate: Rate fluctuates depending on the interest rate environment
· Down payment: Pay at least 5% in cash
· Loan penalty: Dependent on the clause of different banks
· Max loan: 75% of purchase price
A key thing to look out for in loans will be the interest rate, which is what banks earn from lending you a sum of money to pay for your house.
For HDB housing loans, the interest will be 0.1% higher than the CPF Ordinary Account interest rate. It will be reviewed in the months of January, April, July and October in line with the reviews of CPF interest rates. So far, the 2.6% interest rate has been constant for over 2 decades and is unlikely to fluctuate unless the CPF Ordinary Account interest rate were to rise or fall.
For bank loans, the interest rates fluctuate. Currently, most home owners will have their interest rate pegged to a benchmark such as a 3-month SIBOR. The interest rate will be according to the average SIBOR over a period of 3 months and will fluctuate once every 3 months.
What Are Singapore Interbank Offered Rates (SIBOR) & Singapore Overnight Rate Average (SORA)?
Singapore Interbank Offered Rates (SIBOR): SIBOR is based on the interest rates used by 20 banks in Singapore and the rate they charge one another when they borrow from each other. Their rates will be averaged to get SIBOR.
Singapore Overnight Rate Average (SORA): Meanwhile, SORA is based on the past average rate of all interbank lending transactions brokered in Singapore.
For now, SIBOR is still used to price housing/mortgage loan interest rates in Singapore but it will be discontinued and be replaced by SORA from end 2021 onwards.
So if you are considering to take up or currently have a floating rate housing loan package from the banks, these changes to SIBOR and SORA will definitely affect you. Here’s what you need to know about SORA and SIBOR in Singapore.
1. SORA is more predictable and stable than SIBOR
A common misconception is that SORA will lead to higher interest rates for customers. This is completely untrue.
SORA acts as an independent reference rate that reflects market conditions and market level of interest rates. It measures the volume-rated average of past interbank transactions that have already taken place. This means that SORA is more predictable and stable as you can check the SORA for the past month on the Monetary Authority of Singapore (MAS)’s website.
Meanwhile, a 6-month SIBOR is based on the interest rates banks will be setting 6 months into the future, which is unpredictable and you may be faced with unexpected interest rate hikes. When the SIBOR rises, your home loan interest rate rises and you have to fork out more for your home loan repayments that month.
In short, SORA is backward-looking (can be calculated and predicted) while SIBOR is forward-looking (hard to calculate and predict).
2. Greater regulation for SORA compared to SIBOR
SORA is regulated by MAS, unlike SIBOR which is administered by the Association of Banks in Singapore.
According to MAS, SORA will be published by 9am on the next business day in Singapore, alongside the aggregate volume, highest and lowest transacted rates, calculation method (normal or contingency), SORA Index, and the 1-month, 3-month and 6-month compounded SORA.
Reporting banks will have to provide the information on all eligible transactions.
MAS will also review the list of reporting banks periodically to ensure that SORA continues to be a representative and robust benchmark.
3. Easier comparison of loan packages
Today, customers have to navigate through dizzying number of loan packages based on board rates, SIBOR, and possibly SOR-based loans. Adding on the different loan packages referencing different benchmarks, it is even more complicated to compare the loan packages. With the shift to SORA, home owners can now compare across loan packages more easily.
A Quick Recap
Both SIBOR and SORA are benchmark interest rates that banks use to determine the cost of borrowing in Singapore. SORA is generally better because of the following reasons:
· More predictable and stable
· Greater regulation by MAS
· Easier comparison of loan packages