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What is SORA?

Find out what you need to know about SORA, the new benchmark for housing loans in Singapore.

Whether you’re applying for a new home loan or looking to refinance an existing property, the term ‘SORA’ may have come up in your searches. Find out what SORA is and how it works in this guide.

What is SORA?

The Singapore Overnight Rate Average (SORA) is the newly introduced benchmark interest rate for lenders to determine the cost of borrowing.

Administered by the Monetary Authority of Singapore (MAS), SORA is a volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8am and 6.15pm.

While the SORA calculation methodology has been around since 2005, it was enhanced to broaden its market representativeness on 5 August 2020.

How does SORA work?

SORA is computed based on actual transactions brokered in the window between 8am and 6.15pm. This data is provided by reporting banks on each business day in Singapore.

After thorough data validation checks, MAS will proceed to work out the SORA by taking the volume-rated average rate of all eligible transactions. The SORA is then published on the MAS website at 9am the following business day.

Difference between SORA, SIBOR and SOR

Prior to the introduction of SORA, banks in Singapore use other benchmark interest rates like SORA and SIBOR to reflect the cost of borrowing. Each of these benchmark rates are determined differently:

  • SORA. Singapore Overnight Rate Average (SORA) is a volume-weighted average rate of all unsecured overnight SGD cash transactions traded and booked in Singapore between 8am and 6.15pm.
  • SIBOR. The interest rates of floating rate home loans are generally pegged to the Singapore Interbank Offered Rate (SIBOR). For instance, when the SIBOR rises, so would the interest rate for your home loan. Do note that SIBOR will be phased out in the next three to four years, estimated to be sometime in 2024.
  • SOR. The Swap Offer Rate (SOR) was a key benchmark to which many home loan interest rates used to be pegged. It is an implied interest rate determined based on the exchange rate between the Singapore dollar and the US dollar. However, banks have stopped offering SOR-pegged home loans since 2017.

What happens when home loans are pegged to benchmark interest rates?

Benchmark interest rates, whether it’s SORA, SIBOR or SOR, fluctuate on a daily basis. This means that when your home loan is pegged to them, the interest rate you’ll be paying will change constantly as well.

Do note that some benchmarks averaged over a longer period, such as 1-month, 3-month or 6-month SIBOR rates. For example, if you opt for the 6-month SIBOR home loan, the interest rate will be changed according to the average SIBOR over a period of 6 months.

Benefits of SORA-pegged loans

SORA is favoured over the other types of benchmark interest rates due to these main advantages:

  • Easy loan comparison. SORA provides a more uniform interest rate benchmark compared to SIBOR and SOR. This helps borrowers compare between different loan packages with ease.
  • Lower lending risk. With SORA, lenders are less prone to risks that could arise from using varied reference rates for different financial products.
  • Stability. Compounded SORA benchmark rates has much less subjectivity compared to forward-looking term rates, which are often exposed to volatile market factors that may occur on a single day’s fixing. This way, borrowers will not be subjected to sudden and unexpected changes in interest rate.
  • Transparency. Unlike SIBOR, which is established by polling the individual banks’ forward projection, SORA does not involve any expert judgement in its determination. By computing interest rates base on weighted average rates of brokered transactions, it eliminates any possibility of manipulation.

With greater transparency for borrowers and more efficient risk management for lenders, this single interest rate benchmark will soon be the new norm for housing loans in Singapore.

How to apply for SORA-pegged housing loans

Most home loans in Singapore are pegged to either the SIBOR or SOR at the moment. At the time of writing (12 November 2020), the only SORA-pegged home loan available is OCBC‘s 3M Compounded SORA for any new HDB or private property purchase.

Since SIBOR will be discontinued over the next few years, SORA-pegged housing loans will be soon be offered by other banks in Singapore. So if you’re looking to refinance your property but not in too much of a hurry, you may wait a little while longer for more SORA-pegged options to avail. This way, you can compare between the various home loan offers before deciding on one that best suits your needs.

Home loans in Singapore

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