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What’s SORA, and how can it affect your property loan?

Home buyers need to be aware of how their floating rate mortgages will be calculated as Singapore transitions to SORA as an interest rate benchmark.

What’s SORA, and how can it affect your property loan?

About to buy a new home or still paying off one? Here are some questions you might have about SORA. Photos: Shutterstock

Buying a property is one of the biggest financial commitments you will likely ever make, and a key part of that process is choosing a property loan to finance your purchase. The interest rates of most floating rate property loans today are pegged to either the Singapore Dollar Swap Offer Rate (SOR), the Singapore Interbank Offered Rate (SIBOR) or a bank’s board rate.

However, Singapore is in the midst of moving towards a different interest rate benchmark, the Singapore Overnight Rate Average (SORA). This is because SOR and SIBOR will soon be discontinued in line with global benchmark reforms. 

SOR will be discontinued after Jun 30, 2023; the six-month SIBOR will be discontinued after Mar 31, 2022; and the more widely used one-month and three-month SIBOR after Dec 31, 2024. Following the transition, SORA will be the key interest rate benchmark for the Singapore Dollar (SGD) financial markets.

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Infographics: Mediacorp Brand Studio


In preparation for these developments, banks have stopped issuing new SOR-linked loans from May 2021, and have recently stopped issuing new SIBOR-linked loans. Existing loans that are linked to SOR and SIBOR will also need to be converted to alternative packages over the next three years.

SORA is replacing SOR and SIBOR as the SGD interest rate benchmark for use in financial contracts such as loans, bonds and derivatives. Published daily by the Monetary Authority of Singapore (MAS), SORA is a robust and reliable interest rate benchmark that is fully backed by overnight interbank cash transactions in Singapore.

This change will affect property owners who are considering or already have a floating rate property loan package. Here are some answers to the key questions you may have.

1. WHY DO I NEED TO SWITCH OUT OF MY SOR-BASED LOAN?

For borrowers on SOR-based property loan packages, your bank will no longer be able to compute the interest rate based on SOR after it is discontinued. Hence, you should explore your options early and switch out of your existing SOR-based loan to avoid any disruption to your loan.

2. WHAT IS THE SORA CONVERSION PACKAGE? WHY DOES IT INCLUDE AN ADJUSTMENT SPREAD (RETAIL)?

The SORA Conversion Package is a loan package that the MAS-established industry committee, the Steering Committee for SOR & SIBOR Transition to SORA (SC-STS), recommends for banks to make available to existing retail customers with SOR-based property loans.

This package is designed to minimise differences in interest payments at the point of conversion from SOR to SORA. For SOR loans that used the one-month, three-month and six-month reference rates, they will be converted to the three-month compounded SORA after. For existing SOR loan margins, it will remain the same with the relevant Adjustment Spread (Retail) added.

SOR incorporates risk premiums to compensate for the uncertainty involved in lending money over a period of time. On the other hand, SORA reflects overnight lending rates where the risks are much lower. Hence, SORA tends to be lower than SOR. For instance, looking at the past five years, the three-month compounded SORA, which is now widely used in property loans, has been on average about 30 basis points lower than the three-month SOR.

Therefore, when a SOR-based loan is converted to a SORA-based loan, an Adjustment Spread (Retail) is applied so that the all-in rate of the new SORA-based loan package is broadly comparable to the original.

Banks are offering customers with existing SOR loans a switch to the SORA Conversion Package at no additional fee and lock-in period.  You should contact your bank early to find out more about the SORA Conversion Package.

Apart from the SORA Conversion Package, you may also choose to switch to any other loan package like a fixed rate loan that your bank offers off-their-shelf, subject to the prevailing terms and conditions such as lock-in periods that could apply.

3. HOW IS THE ADJUSTMENT SPREAD (RETAIL) COMPUTED?

The Adjustment Spread (Retail) is computed as the average difference between SOR and compounded SORA over the preceding three months, subject to a floor of zero.

To ensure consistent application across the industry, the SC-STS will compute and publish a set of standardised Adjustment Spread (Retail) rates on The Association of Banks in Singapore’s (ABS) website on the first business day of each month. These will be applied to all SOR loans converted to the SORA Conversion Package within that month.

4. WHAT ELSE SHOULD I TAKE NOTE OF?

MAS will not require banks to re-compute the total debt servicing ratio (TDSR) and mortgage servicing ratio for affected SOR-based loan customers making the switch within the same bank. This is a one-time exception as part of the industry-wide exercise to facilitate customers’ switch to replacement loan packages offered by their banks.

If you initiate a refinancing of your property loan with another bank (which will be subject to the bank’s terms and conditions), you should check if other TDSR exemptions apply to you. For example, borrowers who are owner-occupiers are exempted from TDSR when refinancing their property loans.

5. WHAT SHOULD I DO IF I HAVE A SOR OR SIBOR LOAN?

If you have a home or commercial loan pegged to SOR or SIBOR, you will need to switch to a different loan package as both SOR and SIBOR will be discontinued soon.

For SOR loan holders, you should contact your bank immediately to explore options for switching to an alternative loan package.

If you have a loan that references six-month SIBOR, you should contact your bank immediately as the six-month SIBOR will be discontinued by Mar 31, 2022.

If you have a loan that references one-month or three-month SIBOR, which will cease immediately after Dec 31, 2024, your bank will contact you in due course about 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.

Find out more about the transition to SORA.

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