MAS Begins Transition from SOR to SORA

The Monetary Authority of Singapore (MAS) is making the big pivot from SOR to SORA. For those of you with SOR loans (to buy property), this may interest you. For the rest, you can talk about this in a coffee shop and look smart as hell.

What is this “SOR” thing anyway?

The Swap Offer Rate (SOR) is a Forex implied rate, which is used to determine interest rates on certain loans.

Are you still reading? Good, you have more stamina than 80 per cent of the students in first year finance.  Anyway, this matters to property because, right up till 2017, it was possible to find home loans pegged to either the Singapore Interbank Offered Rate (SIBOR), or Swap Offer Rate (SOR).

SIBOR reflects the rates at which local banks lend to each other, whereas SOR is based on the exchange rate between the Singapore dollar and US dollar. But they both worked the same way for property loans – the interest rate was derived from adding the bank’s spread (the bank’s charges) to the prevailing SIBOR or SOR rate, depending on what sort of loan the borrower used.

But we stopped using SOR due to volatility

SIBOR and SOR actually move in tandem (e.g. when one goes up, the other will as well). However, SOR would move up or down in bigger increments than SIBOR. This made the interest rate on SOR-based loans more volatile.

The upside was that, when interest rates went down, SOR rates went down a lot more than SIBOR loans. But given that interest rates began to rise again, SOR fell out of favour. Today, no bank currently offers SOR based loans for residential property; SOR packages exist only for commercial real estate.

But there is some impact still, when SOR switches to SORA

Some borrowers – including home owners – may still be holding on to their SOR packages. For example, for a brief time we saw the emergence of hybrid SIBOR / SOR loans, in which the interest rate was pegged to the average of the two.

Borrowers who adopted such SOR – related packages are still affected by SOR rates; and the coming transition could impact them.

This transition will see the switch from SOR to the Singapore Overnight Rate Average (SORA) as the benchmark. SORA is the weighted average rate of all overnight cash transactions brokered in Singapore, between 8am and 6.15pm. This is necessary due to changes in the London Interbank Offer Rate (LIBOR), which contributed to determining SOR rates (LIBOR is dropping the US dollar in its computation methodology).

In practical terms, this could translate to a little less volatility, as the strength of the US dollar is less of a direct factor. But even with the switch to SORA, the rate is likely to be more volatile than SIBOR, or the increasingly popular Fixed Deposit Home Rates (FHR loans) offered by banks.

Home owners who still have SOR-based packages should consult an independent mortgage broker

If you’re still holding on to a SOR package, we suggest you speak to a mortgage broker; check out the various home loan comparison sites, most of them can help. Your mortgage broker can explain the impact on your monthly payments.

We expect most of you will be advised to refinance if you can, given the rise of more consistent alternatives like FHR loans.

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Are you still on a SOR package? Let us know in the comments section below or on our Facebook post.

If you found this article helpful, check out MAS Begins Transition from SOR to SORA and 9 things about SORA for home loan interest rates.

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