For those who are new to the home loan scene, a world of acronyms awaits.
Among the most commonly stumbled upon is SIBOR – the Singapore Interbank Offered Rate. SOR, or the Singapore Swap Offer Rate, follows closely behind.
Because both rates have a direct impact on certain home loan packages, understanding at least a little about how they work is vital for anyone trying to choose the right home loan.
SIBOR AND SOR – FLOATING RATE LOANS
Both SIBOR- and SOR-pegged mortgages are floating rate mortgages, meaning the repayment amount changes corresponding to any changes in the rates.
SIBOR is based on the Singapore interbank market; SOR is influenced by the more volatile global markets – particularly the USD interest and exchange rates. As a result, while both rates generally trend in the same direction, SOR tends to be more erratic than SIBOR.
When introduced, both SIBOR- and SOR-pegged mortgages were popular because of their transparency: the methods of calculation were known and the rates made available online and in the media.
While SIBOR-pegged loans are currently the most popular type of mortgage in Singapore, SOR-pegged loans have lessened in availability since 2011, when volatility in the markets caused the rate to drop into negative territory.
SO WHAT IS SIBOR?
The Singapore Interbank Offered Rate is the rate at which banks in Singapore lend unsecured funds to each other.
It is calculated daily based on the average cost of borrowing funds in the interbank market – that is, banks borrowing from other banks – for one, three, six and 12-month maturities.
The actual calculation is based on these rates as submitted to the Association of Banks in Singapore (ABS) by at least 12 and up to 20 contributing banks for each maturity each day just before 11am.
The submissions are ranked, the top and bottom quartiles removed, and the average of the remaining submissions, rounded to five decimal places, published as the daily SIBOR for each maturity at 11.30am.
Which is all a very detailed way of saying, SIBOR is a reference rate used as the basis of many mortgages in Singapore.
SIBOR-pegged home loans are typically packaged as SIBOR plus a spread – a premium charged by financial institutions. Because SIBOR is a standard rate, banks differentiate their SIBOR packages by offering different spreads and incentives, such as reduced fees during the lock-in period.
For example, a bank might offer the package:
3M SIBOR + 0.9% (with reduced fees for existing customers of the bank).
If the prevailing three month SIBOR is 1.1%, the total interest rate on the loan would be 2%.
Although SIBOR changes daily, banks use a monthly SIBOR typically based on the first business day of that month. So if on Monday, August 2nd three month SIBOR is 1.02%, that would become the prevailing three month SIBOR rate for August.
1M SIBOR v 3M SIBOR
The number before the M (for Month) in a SIBOR mortgage package denotes how frequently a borrower’s repayments are reset to the prevailing interest rate. So in a one month (1M) SIBOR package, the SIBOR component of the interest rate calculation would be reset every month.
Although officially mortgages are available in one, three, six and 12-month SIBOR tenors, one and three month tenures have been the most popular and widely available during the recent low-interest period.
Advantages of shorter-tenure SIBOR packages:
• More opportunity to take advantage of falling rates.
Advantages of longer-tenure SIBOR packages:
• More certainty around repayments as amounts remain unchanged for longer, and
• Possible savings during interest rate rises.
As a general rule, it is said borrowers can benefit from choosing longer tenures during periods of rising interest rates, and shorter tenures when rates are falling.
Despite this rule-of-thumb, no one can ever really know where interest rates will head – meaning even a borrower who has done their homework could lock in a longer tenure only to find rates begin to fall.
AND WHAT IS SOR?
To the average borrower, the main thing to know about SOR is that its volatility generally means better rates than SIBOR when it plunges, and higher rates than SIBOR when it peaks. As a result, SOR loans traditionally appealed to borrowers with greater risk appetites.
SOR is based on the expected forward exchange rate between US and Singapore dollars and represents the synthetic cost of borrowing Singapore dollars, by borrowing US dollars and then swapping them for Singapore dollars at the end of the same maturity.
Although the “market disruption” clause in most banks’ fine print meant they still charged minimal rates during the time SOR was in negative territory, many banks did stop offering SOR-pegged home loans.
Borrowers also began to shy away from SOR’s unpredictability.
Although far less common than pre-2011, it is still possible to find some SOR-pegged mortgages, and one bank is currently offering a combined SIBOR/SOR package.
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