When shopping around for a home loan, you might have noticed that many floating rate home loan packages are pegged to the Singapore Interbank Offered Rate (SIBOR), which is used by many banks as a benchmark for their floating interest rates.
But what about the London Inter-bank Offered Rate (LIBOR)? You might not see Singapore home loans pegged to LIBOR, but this benchmark has nonetheless sparked some recent changes in Singapore’s finance industry that might be felt when you are shopping around for a home loan.
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What is the London Inter-bank Offered Rate (LIBOR)?
LIBOR, or the London Inter-bank Offered Rate, is a benchmark which measures the average interest charged on the London interbank market. In other words, LIBOR reflects the interest rates charged by London banks when extending unsecured loans to other banks.
LIBOR is based on the USD, the Euro, the British Pound, the Japanese Yen and the Swiss Franc, with the 3-month USD rate being the most commonly used rate.
It is used by many banks all over the world as a benchmark to which their interest rates are pegged.
However, LIBOR will no longer be published from the end of 2021, which means that many banks are going to have to switch to a different benchmark for their loans.
How to check LIBOR rates
LIBOR changes from day to day. LIBOR rates are publicly available and can be found on various websites like this one.
What is LIBOR used for in Singapore?
You will probably not find home loans pegged to LIBOR in Singapore, with SIBOR being the most common benchmark for mortgage packages here.
However, that does not mean that the phasing out of LIBOR has not affected Singapore.
The Singapore Swap Offer Rate (SOR) was previously a common benchmark to which floating home loan interest rates in Singapore were frequently pegged. SOR is derived from the USD-SGD spot and forward foreign exchange rate. More specifically, it indicates the cost of borrowing USD and then converting it to SGD through an FX Swap.
The issue is that the computation of SOR involves the use of the USD LIBOR. So, when LIBOR is discontinued in 2021, that could call into question the existence of SOR, as well.
The Monetary Authority of Singapore (MAS) already pre-empted this by beginning to phase out SOR a few years back.
In August 2019, the Singapore Overnight Rate Average (SORA) was designated by the MAS as a replacement for SOR, which will be definitively discontinued by the end of 2021.
As far as home buyers are concerned, SOR is already obsolete as banks in Singapore no longer offer new home loans pegged to SOR. While most banks currently peg their floating home loan interest rates to SIBOR or board rates, in August this year, OCBC became the first bank to offer floating home loans with interest rates pegged to the SORA, SOR’s replacement.
In time to come, some commentators think SIBOR, too, will be replaced by SORA, as publication of SIBOR could be discontinued by 2024.
Why is LIBOR being phased out?
LIBOR has been plagued with controversy in recent years. Years ago, it was discovered that LIBOR had been manipulated by colluding bankers at several leading financial institutions for years, in what has been dubbed the LIBOR Scandal.
To understand how LIBOR can be manipulated, we must first understand how the LIBOR figures are derived.
Major banks are asked on a daily basis to submit their interest rates for the interbank market. These are not interest rates that have already been charged in the past, but projected interest rates for the future. Thus, banks can technically manipulate LIBOR by deliberately raising or lowering their submitted interest rates.
The LIBOR Scandal
That is exactly what happened in the LIBOR Scandal. In order to manipulate LIBOR, traders submitted artificially inflated or deflated interest rates with the goal of influencing the LIBOR reading in favour of their own trading activities. Due to LIBOR’s prominent role in the finance industry, there was a cascade of knock-on effects—everything from home loans interest rates to pricing of derivatives was affected.
During the financial crisis of 2008, the LIBOR’s unnatural movements provoked suspicion, which led to an investigation which uncovered the individuals responsible for rigging it. Some of those individuals are still in jail.
So, it comes as no surprise that LIBOR (as well as other -IBORs like SIBOR) are now being phased out in favour of benchmarks that are less easily manipulated. Benchmarks like SORA are overnight risk-free rates that are much more transparent and offer greater stability.
SORA, which is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8am and 6:15pm, measures transactions that have already taken place. As a retrospective measure, it is less easily manipulated than foward-looking benchmarks like LIBOR. It also offers greater predictability as any interest rate changes can be forseen based on recent transactions.
After the vulnerabilities of the scandal-plagued LIBOR were exposed, the world of global finance sought to phase it out by the end of 2021.
SOR, to which many Singapore home loan packages’ interest rates were previously pegged, is a benchmark which uses the LIBOR in its computation. Thus, SOR had to be phased out in Singapore as well, and has since become more or less obsolete as far as home loans are concerned.
The next benchmark in line for obsolescence is SIBOR, which is likely to be phased out by 2024. At the moment, SIBOR is the most common benchmark for floating home loan rates.
SORA has been put forward by MAS as a replacement for SOR. If things go as planned, it looks like SIBOR-pegged interest will the near future be replaced by SORA-pegged interest rates. SORA is not derived from external benchmarks like LIBOR and is supposed to offer greater transparency and stability. For borrowers, that is actually a good thing as interest rate hikes will not be as unpredictable.
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