SORA Rate 2023
As you begin your journey to getting your new home, you may encounter a few terms which are relatively new, such as the Singapore Overnight Rate Average (SORA) and the Singapore Interbank Offered Rate (SIBOR). These are benchmark interest rates that banks use to determine the various types of home loans in the market. So although they don’t usually concern the average consumer, home buyers would come across these acronyms while looking at mortgage packages. To help you get started, let’s get you up to speed on what exactly these benchmarks are, what the differences are between SORA and SIBOR, how they affect your home loans and more.
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What Is SORA?
The Singapore Overnight Rate Average (SORA) is an interest rate benchmark, like the Singapore Interbank Offered Rate (SIBOR) and the Singapore Dollar Swap Offer Rate (SOR). Banks use these rates to determine the types of floating-rate housing loans they offer. To have a better understanding of SIBOR, refer to our SIBOR Rate Chart.
Backward-looking interest rate benchmark
SORA, which stands for Singapore Overnight Rate Average, reflects the actual transactions between banks, made between 8am and 6.15pm in Singapore. This means that SORA is based on backward-looking overnight transactions unlike SIBOR or SOR which are based on forward-looking future transactions. All these interest rate benchmarks fluctuate on a daily basis, so if you’re taking a housing loan with your interest rate pegged to them, your loan repayments will change too. However, you can pick a loan package where the interest rate “refreshes” less often — for example, only once every 3 months — for more stability.
Pegged to floating-rate home loan packages
While floating-rate housing loans tend to be less costly than fixed-rate housing loans, the changing nature of your monthly interest repayments is something you’ll have to deal with due to market uncertainties. Similar to SIBOR-linked loans, you’ll need to decide how often you’ll prefer to have your interest rate refreshed. Currently, you can choose between 1-month compounded SORA and 3-month compounded for most SORA loan packages offered in the market. Your interest payments will fluctuate monthly or quarterly, respectively.
Why Is SORA Replacing SIBOR and SOR?
Introduced as the new benchmark interest rate by the Monetary Authority of Singapore (MAS) in August 2019, SORA have replaced SOR since 2021 and is already replacing SIBOR. By 2024, SIBOR will be completely phased out. To understand better, learn more about the differences between SIBOR, SOR and SORA in the article.
Discontinuation of LIBOR
This move towards SORA is due to the fact that the computation of SIBOR and SOR rates utilise the scandal-tainted London Interbank Offered Rate (LIBOR). The scandal involved bankers at some renowned financial institutions who engaged in fraudulent manipulations of the LIBOR. As a result, significant fines and lawsuits were carried out and this incident eroded trust within the financial industry and also the public’s trust in the marketplace.
Global financial benchmarks reform
Previously, banks priced mortgage loans based on SIBOR rate (or SOR when applicable). But as we’ve seen, the unreliable LIBOR would directly affect SIBOR- and SOR-linked loans. Thus, the regulatory authorities of many countries including Singapore called for a global reform to improve the robustness and integrity of financial benchmarks. This includes replacing SIBOR and SOR with SORA.
As SORA is calculated based on actual transactions and meets the standards of international best practice, it is regarded as a more legitimate benchmark than its predecessors. Moreover, it’s based on backward-looking overnight transactions which makes it less volatile and less risky than SIBOR or SOR that are based on forward-looking future transactions. Banks will need to replace SOR with SORA by the end of 2021, while the transition from SIBOR to SORA will take place more gradually over the next 3 years.
How Is SORA Calculated?
Despite SORA being introduced quite recently, its calculation methodology isn’t really new in the financial industry. In fact, it has been used to price certain commercial loans since 2005.
To calculate SORA, banks are required to provide data on all eligible transactions traded and booked in the unsecured overnight interbank market between 8am and 6.15pm.
Thereafter, MAS will validate the data and calculate the volume-weighted average rate of all eligible transactions. This derived rate will then be published the following day at 9am on MAS website.
SORA, SIBOR and SOR: What's the difference?
How Do SORA Rates Affect You?
As we gradually make the transition, more SORA-pegged home loans are being introduced by banks to replace the former SIBOR-pegged loans which were offered to home buyers.
Moreover, with the frequent US Fed interest rate increases over the past year, many home loan rates in Singapore which are pegged to either the SORA or SIBOR are inevitably affected, so homebuyers can expect an increase in floating and fixed mortgage rates in Singapore. You can read more about how the US Fed interest rate hike will affect your SORA-pegged or SIBOR-pegged home loanshere.
Difference Between 1-Month SORA rates & 3-Month SORA rates
As the name suggests, the 3-month SORA benchmark is averaged out over a longer period than 1-month SORA benchmark. For example, let’s say your home loan interest rate is pegged to the 3-month SORA rate, this means for your home loan, you will be charged according to the average SORA rate over a period of 3 months. Thus, it may fluctuate once every 3 months.
3-month SORA rate
As the more commonly used benchmark for most home loans offered by banks in Singapore, the 3-month SORA rate represents the average rate at which unsecured overnight interbank transactions occur in the Singapore dollar market over a three-month period. The 3-month SORA rate is commonly used as a reference for longer-term loans or financial products that reset or adjust every three months.
1-month SORA rate
On the other hand, the 1-month SORA rate represents the average rate at which unsecured overnight interbank transactions occur in the Singapore dollar market over a one-month period. It is a daily compounded rate based on the SORA rate for each business day during the month. The 1-month SORA rate is typically used as a reference for shorter-term loans or financial products that reset or adjust monthly.
Is The 1- Month Sora Rate A Better Benchmark Than A 3-Month Rate?
The suitability of the 1-month SORA rate or the 3-month SORA rate benchmark for the home loan that you’ll be getting really depends on various factors and individual preferences. You’ll need to carefully evaluate your financial situation, risk tolerance, and long-term plans before deciding between the 1-month SORA rate and the 3-month SORA rate for your home loan. Here are some aspects to consider when you’re choosing between a home loan that is pegged to a 1-month SORA rate or 3-month SORA rate benchmark.
Interest Rate Stability
The 1-month SORA rate generally reflects changes in the market more quickly compared to the 3-month SORA rate. If you prefer a more responsive interest rate that adjusts more frequently, the 1-month SORA rate may be more suitable for you. However, this also means that your monthly payment amounts may fluctuate more often.
Interest Rate Volatility
The 3-month SORA rate may provide more stability as it is an average rate over a three-month period. This can offer more predictable monthly payments, especially if you prefer a longer-term view and want to avoid frequent adjustments in your loan's interest rate.
Consider the duration of your home loan. If you have a shorter loan term or plan to refinance or sell the property in the near future, the 1-month SORA rate might be a better fit as it offers more flexibility and frequent adjustments. On the other hand, for longer loan terms, the 3-month SORA rate can provide a more stable and predictable rate over a sustained period.
The 1-month SORA rate may be considered riskier by some borrowers due to its potentially higher volatility. If you prefer a more conservative approach and want to minimize interest rate fluctuations, the 3-month SORA rate could be a more suitable choice.
Should I Choose Fixed or Floating-rate Home Loans?
Whether you’re planning to refinance or you’ve set your eyes on a new home, you may face a dilemma when deciding to stick to your existing floating-rate home loan or switch to a fixed-rate home loan.
In the meantime, let’s break these terms down to help you gain a better understanding of both floating-rate and fixed-rate home loans.
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Frequently Asked Questions
What is the SORA rate now?
- The 1-month, 3-month and 6-month compounded SORA rates are currently at 3.7522% p.a., 3.6501% p.a., and 3.4825% p.a. respectively (last published on the Monetary Authority of Singapore (MAS) website on 15 June 2023).
How is the SORA rate derived?
- Reporting banks are required to provide data on all eligible transactions traded and booked in the unsecured overnight interbank market between 8am and 6.15pm in Singapore. MAS will then validate the data and calculate the volume-weighted average rate of all eligible transactions, using the formula referring to the SORA Index for the computation of Compounded SORA. This formula is used for the 1-month, 3-month and 6-month compounded SORA rates.
What affects SORA rates?
- SORA rates are affected by several factors including Singapore’s economic outlook i.e. a boom or a recession, the volume of eligible transactions of minimum $1 million from at least 5 reporting banks as the rates are based on the previous day’s transactions and published at 9am the following day, every day. Another factor is the credit profiles of the reporting banks; the lower the credit quality of a bank, the higher the borrowing rate.
What is the difference between SORA and SIBOR?
- SORA is determined by the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore, while SIBOR is based on the interest rates at which banks offer to lend to other banks in the unsecured interbank market (how and what future rates which banks plan to borrow at).
When will the SORA rate go up or down in Singapore?
- The SORA rate will tend to go up when there's inflation and go down when there’s a recession. It can fluctuate according to other trends and changes in political and economic policies as well.
Is SORA a risk-free rate?
- No. Although SORA is based on backward-looking overnight transactions which is less volatile and less risky than SIBOR that is based on forward-looking future transactions, this doesn’t make SORA risk-free.
Is the SORA rate better than SIBOR?
- The SORA rate offers more stability than SIBOR due to its calculation methodology and being validated by the the Monetary Authority of Singapore.