Understanding how SORA impacts your business
Business owners looking to finance a commercial property purchase or refinance an existing property loan will need to understand how interest payments are calculated using the SORA interest rate benchmark.
Existing interest rate benchmarks – the Singapore Dollar Swap Offer Rate (SOR) and the Singapore Interbank Offered Rate (SIBOR) – are being phased out over the next two to three years. In tandem, banks here are shifting to the Singapore Overnight Rate Average (SORA), which will become the main interest rate benchmark for Singapore dollar loans going forward.
This change will see all SOR-based loans converted to alternative packages ahead of SOR’s discontinuation after Jun 30, 2023. Loans based on SIBOR will also be converted, though at a later stage, as the widely used one-month and three-month SIBOR will only be discontinued after Dec 31, 2024.
Issuance of new SORA-based loans is on the rise. As of Apr 30, 2021, a total of S$4.2 billion worth of SORA-based retail and corporate loans have been issued by domestic systemically important banks in Singapore.
Mrs Ong-Ang Ai Boon, director of The Association of Banks in Singapore (ABS), answers some important questions that businesses may have regarding the shift to SORA.
1. WHY DO I HAVE TO SWITCH OUT OF MY SOR- OR SIBOR-BASED COMMERCIAL PROPERTY LOAN?
The move away from SOR and SIBOR is in line with global interest rate benchmark reform efforts to improve the robustness and integrity of financial benchmarks.
SOR will be discontinued as its computation relies on the US Dollar London Interbank Offered Rate (USD LIBOR), which international regulators have decided to discontinue after Jun 30, 2023. SOR will therefore be discontinued after the same date.
SIBOR is also being phased out in line with other interbank offered rates across the world. The six-month SIBOR will be discontinued after Mar 31, 2022, while the one-month and three-month SIBOR will be discontinued after Dec 31, 2024.
For borrowers on SOR- or SIBOR-based property loan packages, your bank will no longer compute the interest payments based on SOR or SIBOR after they are discontinued. You will therefore need to switch to an alternative loan package, such as one based on SORA.
2. HOW IS SORA DIFFERENT FROM SOR AND SIBOR?
SOR and SIBOR reflect the cost of borrowing Singapore dollars over periods such as a month, three months or six months. SOR is the effective rate of borrowing Singapore dollars by first borrowing US dollars and then swapping these for Singapore dollars, while SIBOR measures directly the cost of borrowing Singapore dollars on an uncollateralised basis. Both SOR and SIBOR are published by the ABS Benchmarks Administration Co (ABS Co).
In contrast, SORA reflects the cost of borrowing Singapore dollars on an overnight basis. SORA tends to be lower than SOR and SIBOR because overnight lending rates – being free of term and credit risk premiums that are present when lending to counterparties over longer periods – tend to be lower than term lending rates. SORA has been published daily by the Monetary Authority of Singapore (MAS) since 2005. It is a transparent, robust and reliable measure of market interest rates as it is based on a large volume of actual transactions taking place in overnight interbank lending markets each day.
3. WHY DID THE LOAN SPREAD CHANGE WHEN I CONVERT MY SOR- OR SIBOR-BASED LOAN TO SORA-BASED LOAN?
The overall interest rate for a floating rate loan is made up of the reference rate (i.e. SOR, SIBOR or SORA) and the loan spread. In the conversion of a SOR- or SIBOR-based loan to a SORA-based loan, the loan spread may be adjusted to account for differences in term and credit risk premiums between SOR/SIBOR and SORA.
You should discuss with your bank how the loan spreads and overall interest rates differ across the options.
4. HOW ARE INTEREST PAYMENTS DETERMINED IN SORA-BASED LOANS?
Borrowers today are familiar with the use of SOR or SIBOR interest rates where, for instance, interest payments due at the end of each interest period (one, three or six months) of the property loan are typically based on the SOR or SIBOR rate at the start of that period.
In comparison, there are two different approaches to the use of SORA in loans. For loans used by large businesses, interest payments due at the end of each interest period would tend to be based on the average of daily SORA rates within that interest period. This means that interest amounts due can only be known towards the end of the interest period, giving borrowers less time to prepare for their payments. However, this is fine as large corporations are likely to have resources and systems dedicated to managing finances.
Most retail customers and smaller businesses may require advance notice on payments due. Banks will typically also offer SORA loan packages where interest payments due at the end of each interest period are based on compounded-in-advance SORA rates. Compounded-in-advance SORA is the average of the daily SORA rates from a prior interest period and it allows for the interest payments to be determined at the start of an interest period, similar to SOR and SIBOR loans.
Regardless of the approach, the averaging effect of the compounded SORA rates helps to smooth out interest rate fluctuations. Interest payments for SOR and SIBOR loans rely on a single day’s reading on the date when the interest rate resets, making them more exposed to idiosyncratic market factors on that particular day.
5. HOW DO I SWITCH OUT OF MY SOR- OR SIBOR-BASED LOAN?
For SOR loan holders, you should contact your bank as soon as possible to explore options to switch to an alternative loan package that meets your business needs.
If you have a loan that references six-month SIBOR, you should contact your bank immediately as the six-month SIBOR will be discontinued after Mar 31, 2022.
If you have a loan that references one-month or three-month SIBOR, your bank will contact you in due course to guide you in replacing your SIBOR loan with other loan packages. In the meantime, if you are looking to refinance your existing SIBOR loan, you can consider the available bank loan packages, including SORA-based loans as well as other alternatives, such as fixed-rate loans, and loans linked to board rates or deposit rates.
6. WILL MY TOTAL DEBT SERVICING RATIO NEED TO BE REASSESSED?
Total debt servicing ratio (TDSR) is only applicable to individuals, sole proprietors and shell companies with property loans. As part of the industry-wide exercise to facilitate a smooth transition from SOR to SORA, MAS will not require TDSR to be re-computed for affected borrowers making the switch within the same bank.
If you initiate a refinancing of your investment commercial property loan or property loan with another bank (which will be subject to that bank's terms and conditions), you should check if you can avail yourself of other TDSR exemptions.
Find out more about the transition to SORA.