SORA: How Singapore’s interest rate benchmark transition affects you

In line with global interest rate benchmark reforms, the two Singapore Dollar (SGD) benchmark rates that many borrowers are familiar with – the Singapore Dollar Swap Offer Rate (SOR) and the Singapore Interbank Offered Rate (SIBOR) – are being phased out. Over the next two years, the Singapore Overnight Rate Average (SORA) will replace SOR and SIBOR as the main interest rate benchmark for floating rate loans in SGD.

SOR will be discontinued after Jun 30, 2023. SIBOR will be phased out over the next few years, with the six-month SIBOR being discontinued after Mar 31, 2022, followed by the one-month and three-month SIBOR after Dec 31, 2024.

In preparation for the transition, banks stopped issuing SOR- and SIBOR-linked loans since May 2021 and October 2021 respectively and began issuing new SORA-linked loans. Existing customers with SOR-linked loans will need to convert to alternative packages, followed in due course by customers with SIBOR-linked loans.

THE NEW SORA-CENTRED INTEREST RATE LANDSCAPE

SORA is a transparent, robust and reliable benchmark that is administered by the Monetary Authority of Singapore (MAS). It is calculated and published daily based on banks’ overnight borrowing transactions with one another.

For Mr Wong Wei Siong, the SORA-linked loan was his first loan arrangement for a newly purchased condominium. The 31-year-old customer success manager shared that his interest rate was calculated at 0.92 per cent – based on a three-month compounded SORA rate of 0.12 per cent, plus a 0.80 per cent loan margin. As a new buyer, he checked the interest rates against what is published daily by MAS on its website.

"Transparency is an important element when it comes to mortgages. The fact that the rates and calculations can all be found on MAS’ website is reassuring." Mr Wong shared.

If you are considering taking up a SORA-linked loan package, you should note that these loans generally reference compounded SORA, which is the compounded average of daily SORA readings over a period of time (typically one, three or six months).

This averaging effect helps to smooth out day-to-day fluctuations in interest rates, allowing for more stable interest payments. Changes in the interest rate environment will still be reflected in your loan servicing costs, but this will happen more gradually over time.

Mr Chung Wan Thim is another new SORA-linked loan customer. The 42-year-old IT trainer who works in legal services said that while the rates for his new property loan are subject to change every quarter, “the interest rates adjust more smoothly” across interest periods due to the use of compounded SORA.

TRANSITIONING TO SORA

While Mr Wong and Mr Chung are first-time borrowers, others with existing SOR-linked loans will have to convert to alternative packages. Retail borrowers with SOR-linked loans can opt to take up the SORA Conversion Package, which switches their existing loans to a comparable one based on three-month compounded SORA, with no additional fee or lock-in period.

The SORA Conversion Package is designed to minimise differences in interest rates at the point of conversion.

The loan margin that customers were previously paying on their existing SOR-linked loan is carried over to the newly converted SORA-linked loan. For example, if your three-month SOR included a loan margin of 1 per cent, the loan margin will remain the same under the SORA Conversion Package.

In addition, because SOR is generally higher than SORA, an Adjustment Spread (Retail) is added so that the all-in rate of the SORA Conversion Package is broadly comparable to the original. SOR and SIBOR rates tend to be higher than SORA because they incorporate risk premiums to compensate for the uncertainty involved in lending money over a period of time, while SORA is based on overnight transactions. Over the past five years, the three-month compounded SORA, which is now widely used in property loans, has been about 0.30 percentage points lower on average than the three-month SOR.

Apart from the SORA Conversion Package, customers may also choose to switch to other loan packages offered by their bank. They may, however, be subject to the prevailing terms and conditions, such as a lock-in period.

In addition, as a one-time exception to facilitate the transition away from SOR, MAS will not require banks to re-compute the total debt servicing ratio (TDSR) for affected customers making the switch within the same bank.

Customers who decide to switch to alternative loan packages with other banks can check if they will be exempted from TDSR rules. For example, borrowers who are owner-occupiers are exempted from TDSR rules when refinancing their property loans with other banks.

For those currently servicing a loan that references SOR or the six-month SIBOR, you should contact your bank as soon as possible to convert to an alternative loan package that meets your needs. For others who have loans that reference the one-month or three-month SIBOR, your bank will contact you in due course to guide you in replacing your existing SIBOR-linked loans.

Find out more about the transition to SORA.