From SIBOR to SORA: What you should know about the upcoming change in home loan interest rate benchmarks

Even if you’re a homeowner who’s not looking to buy a new place, you still might need to take note of the upcoming change in interest rates benchmarks – especially if your current home loan is based on the Singapore Interbank Offered Rate (SIBOR).

After Dec 31, 2024, SIBOR will be replaced with the Singapore Overnight Rate Average (SORA). This affects all SIBOR-based home loans and includes floating and fixed-rate packages that are pegged to SIBOR after the lock-in period has ended. This is because interest payments based on SIBOR can no longer be computed after its discontinuation.

Here are the key things you should know about the upcoming transition from SIBOR to SORA.

BACKGROUND TO THE CHANGE

In 2019, the Monetary Authority of Singapore (MAS) established the industry-led Steering Committee for SOR & SIBOR Transition to SORA (SC-STS) to oversee an industry-wide interest rate benchmark transition to SORA.

According to the group’s report, SORA offers greater efficiency in risk management for lending institutions and better transparency in loan market pricing for borrowers.

Administered by MAS, SORA is published as a daily rate and as a series of one-, three- and six-month compounded average rates on the MAS website. The compounded SORA rates are more robust and less volatile as it is anchored to actual market transactions in the overnight interbank funding market. SIBOR may not always be fully backed by transactions – it is based on a bank’s estimates of what it needs to pay another bank to borrow Singapore dollars. 

If your home loan is currently based on SIBOR or has a SIBOR-linked component, you can choose from these three options.

Option 1: Switch to an alternative prevailing property loan package before Apr 30, 2024

Contact your bank by Apr 30, 2024 to discuss your options, be it a prevailing fixed or floating rate loan package. Do this early to give yourself ample time to compare all the available package options.

If you remain with the same financial institution, you will not need to undergo a re-computation of the mortgage servicing ratio (MSR), loan-to-value ratio (LTV) and total debt servicing ratio (TDSR) as the loan replacement is necessitated by SIBOR’s discontinuation.

If you refinance with another institution, you may be subject to re-computation according to prevailing property loan rules, in addition to any fees applicable according to the terms of your existing loan package.

Option 2: Take up the SORA Conversion Package before Apr 30, 2024

To ease the transition process, customers with existing SIBOR-based home loans can take up the SORA Conversion Package (SCP) without additional fees or an additional lock-in period.

The SCP has three key components: The unchanged loan margin from your existing SIBOR-based loan, the three-month compounded SORA, and an adjustment spread, to account for the difference between SIBOR and the three-month compounded SORA.

Published by ABS Benchmarks Administration Co on the first business day of each month, each month’s adjustment spread applies to customers transitioning to the SCP during that month. For example, the adjustment spread published on Feb 1, 2024, will apply to all SCP loans taken in February.

If you take up the SCP by Apr 30, 2024, the adjustment spread will be calculated as the average difference between the applicable SIBOR and three-month compounded SORA in the preceding three-month period. The minimum adjustment spread will be set at zero.

Once the transition to SCP takes place, the adjustment spread remains fixed in your loan for the remaining duration of your loan.

During the active transition phase, loan payments on the SCP should be broadly comparable to those of the original SIBOR loan at the point of conversion.

Option 3: Let your loan automatically convert from SIBOR to SORA starting from Jun 1, 2024

If a borrower does not proactively opt for Option 1 or Option 2 by Apr 30, 2024, their SIBOR-based home loans will automatically be converted to the SCP in June 2024.

The SCP would be applied with an adjustment spread computed as the historical median between the applicable SIBOR and three-month compounded SORA from Jun 30, 2018, to Jun 30, 2023. These spreads are set at 0.2426 per cent and 0.3571 per cent respectively, to convert loans referencing the one-month and three-month SIBOR to the three-month compounded SORA.

Being fixed upfront, the five-year historical median offers customers early certainty on the applicable adjustment spread that will apply to their SIBOR-based loans in the automatic conversion to SCP in June 2024.

TAKE A HANDS-ON APPROACH TO YOUR FINANCES

As a mortgage is usually a homeowner’s largest financial liability, it is important that customers give themselves enough time to choose an option that aligns with their financial requirements.

Until Apr 30, 2024, homeowners with SIBOR-based loans can refer to the ABS website to evaluate the current month’s adjustment spread against the five-year historical median.

If the all-in interest is favourable to their financial goals, they can lock in their switch to the SCP during the same month. If it is not favourable, they can take up one of their bank’s prevailing packages or continue monitoring the adjustment spread if there is still time before Apr 30. Thereafter, all SIBOR-based loans will automatically be converted to the SCP in June 2024.

Keeping an eye on the adjustment spread is in your best interest, as locking in a low adjustment spread may lead to a favourable all-in rate, which can help you to save money on subsequent interest payments. To make the most informed choice, approach your bank or relationship manager early so they can help you assess which loan option best suits your financial preferences.

If your home loan is based on SIBOR, speak to your bank by Apr 30, 2024, to choose another home loan package or to take up the SCP, before the automatic conversion takes place in June 2024.