Looming inflation and rising interest rates are upon us, with the US Federal Reserve looking to raise interest rates as early as March 2022.

Singapore pegs its interest rates to those of the United States, so we will likely see our interest rates increase as well. UOB economists forecast that SORA’s key benchmark rate could rise from 0.25% in the first quarter of 2022 to 1.01% by the end of the year.

What does it mean?

This means that if you currently have a mortgage, your mortgage payments will be higher. Mortgages represent more than 75% of a household’s monthly recurring expenses.

MAS advises households to be aware of their ability to meet their mortgage obligations. Highly indebted households are also recommended to build up financial reserves.

Singapore’s current references

Currently, the most common benchmark interest rates are the Swap Official Rate (SOR) and the Singapore Interbank Offered Rate (SIBOR). They have served as the cornerstone of interest rates for at least two decades, since the late 1990s.

We’ve covered the differences between SOR and SIBOR in depth here.

1. Transition to SORA

SOR and SIBOR are currently being phased out to make way for SORA, the new gold standard moving forward. As of March 2021, the option for SORA has been rolled out by most major banks, with over $1 billion in such loans granted to date.

The MAS has formed the steering committee for the transition from SOR & SIBOR to SORA (SC-STS). It consists of a Core Steering Committee comprised of senior representatives from Singapore’s major banks, relevant industry associations and MAS.

The role of the SC-STS is to facilitate an industry-wide transition from SOR to SORA. Industry participants include commercial and retail customers (such as homeowners with outstanding bank loans).

Here are some deadlines to note:

  • March 31, 2022 – The six-month SIBOR will be discontinued
  • June 30, 2023 – SOR will be discontinued
  • December 31, 2024 – One-Month and Three-Month SIBOR will be discontinued

Since August 2020, the MAS has started to publish the compound rates for one month, three months, six months and a SORA index. This assures customers that the variable rates come from a transparent and reliable source.

2. SORA exists since 2005

Contrary to what people may believe, SORA is not a newcomer. The Monetary Authority of Singapore (MAS) has published daily SORA rates since July 2005.

The Singapore Banking Association describes the Singapore Overnight Rate Average (SORA) as the volume-weighted average rate of borrowing transactions in the overnight unsecured SGD interbank cash market in Singapore between 8 a.m. and 6 p.m. h 15.

Once the data has been validated, it is published before 9:00 a.m. the following working day. MAS regularly reviews the list of reporting banks to ensure that the SORA remains robust and representative of the benchmark rate.

3. SORA is predictable and stable

When comparing how SORA calculates interest rates versus SIBOR, SORA takes past transactions, while SIBOR looks at future transactions.

This means that with SORA you can know what to expect next month. SIBOR is more volatile because banks can decide to raise or lower future interest rates without notice. You won’t be surprised by unexpected rate hikes.

How it differs from SOR. For borrowers, the averaging effect of the compound SORA will provide much more stable rates than one-day SOR statements. SOR rates are regularly exposed to capricious market factors, such as volatility in the quarter or at the end of the year.

Unlike SOR, SORA performs SGD-based transactions, eliminating the need to account for constantly fluctuating exchange rates.

How it differs from SIBOR. SORA works on the basis of calculating the rate of all interbank lending transactions compared to SIBOR, where it takes 20 banks. This makes the process much more transparent and less complicated.

4. SORA rates are currently quite attractive

Currently, SORA rates are quite attractive due to the current low interest rate environment. Although slowly rising, the three-month compound SORA is 0.2086% per annum as of February 4, 2022.

PHOTO: Monetary Authority of Singapore (MAS)

The overall net loan rate is 1.2086% per annum, assuming the bank charges a 1% spread.

5. Compound SORA calculation

Most SORA loans in the market are based on the one-month or three-month compound rate. Advance Compounding provides notice of the applicable interest rate and monthly installment payable for the period ahead until the next rate reset date.

Knowing the payment amounts in advance allows you to better plan your finances.

Here’s how the one-month and three-month compound SORA rates are calculated for a set of loans with a 30-day rate reset and a 90-day rate reset respectively.

SORA rate compounded over 1 month
PHOTO: ABS

SORA rate capitalized over 3 months
PHOTO: ABS

Depending on your bank’s internal processes, Day “T” refers to the date of loan disbursement or acceptance of letter of offer, etc.

Banks may also apply a compound SORA rate of one month from a prior 30-day period that does not immediately precede day “T” and each rate reset date, in accordance with each bank’s internal processes.

What you need to do if you currently have an SOR loan

If you currently have an SOR loan, your bank should contact you within the next two months and provide you with options to convert your SOR loan no later than October 31, 2022. This way, you will not be disrupted by the discontinuation of the SOR . after June 30, 2023.

There should be no administrative or conversion fees to pay, as well as a lock-up period when you decide to subscribe to the SORA conversion package.

The SORA conversion package consists of three components, including:

SORA consisting of three months.

3M Compound SORA is the most commonly offered default for SORA loan packages. It equalizes rate volatility by taking the compound average of the daily SORA over the previous three months.

However, since it is a floating reference rate, your monthly interest payments will fluctuate slightly. If you’re more cautious and prefer something more predictable, you have the option of upgrading to a fixed rate loan instead.

In the event of an unexpected rise in interest rates, you can remain calm and not panic, because you will pay the same amount regardless of the fluctuations.

Note that switching to a fixed rate loan means your LTV and TDSR will be recalculated based on the latest cooling metrics.

Your current SOR margin.

Banks will keep your existing SOR margin in the SORA conversion package to ensure your new loan is comparable to your previous loan.

Adjustment gap.

Published monthly on the first business day from September 1, 2021 to September 1, 2022, this spread reflects the average difference between the SOR and SORA compounded in advance over three months before being published.

Each bank will have a different adjustment spread, so we encourage you to contact your respective banks for more information on early transfer of your SOR loan.

It’s best to stay informed and plan ahead before changing loans or taking out a new loan. Consult a specialist, such as a mortgage broker or your bank, so that you have an expert to guide you through the different options and loans available.

This article was first published in 99.co.