Switching from SOR and SIBOR to SORA: What you need to know
couple moving house

19 Nov 2021 | 4 min. read

SORA will be replacing SOR and SIBOR as the key interest rate benchmark for Singapore Dollar loans and other financial products.

Existing borrowers on SOR or SIBOR loans will need to switch out to a new loan package.  Affected borrowers can choose from packages that reference the Singapore Overnight Rate Average (SORA) or other prevailing packages offered by their banks.

What is SORA

SORA is the volume-weighted average borrowing rate in Singapore's unsecured overnight interbank cash market.  It has been administered by the Monetary Authority of Singapore (MAS) since 2005.

 

SORA loan packages are priced using the compounded average of the daily SORA rate over one, three, or six months. Because the calculation for interest payments is based on SORA over an average over a period, the interest rate applied to such loans tend to be less volatile.

 

In contrast, interest payments on SIBOR-based and SOR-based loans are determined by the prevailing rate on a single day and could change abruptly in the event of interest rate fluctuations on interest reset dates. 

 

Note

SOR is the effective rate of borrowing Singapore dollars synthetically, by borrowing US dollars and converting them to Singapore dollars in the foreign exchange market. SIBOR is what a bank estimates it will have to pay another bank to borrow Singapore dollars. It is calculated based on daily submissions by a panel of contributor banks and may not be always fully backed by transactions.

 

Unlike SIBOR, which is based on estimates from Singapore banks, SORA is based on transaction data and is published at 9am daily.

 

The impending discontinuation of SOR and SIBOR is in line with a shift in financial markets worldwide towards interest rate benchmarks that are computed based on transaction data. For instance, SOR which relies on USD LIBOR in its computation, will be discontinued after 30 June 2023, alongside the discontinuation of USD LIBOR.

SOR and SIBOR will be replaced by SORA.

 

What to expect

For SOR borrowers

There are two options: (1) the SORA Conversion Package or (2) other loan packages offered by your bank.

Option 1: SORA Conversion Package

If you haven’t switched out of your SOR residential loan package, your bank will automatically convert you to the SORA Conversion Package in October 2022 so that there is no disruption to your loan when SOR is discontinued. The bank will do this by:

  • Your bank will switch your SOR loan to a SORA loan by applying a standardised Adjustment Spread (Retail) on your original loan margin. An adjustment spread is necessary to account for term and credit risks, which SOR factors in but SORA does not – this is why SORA is typically lower than SOR. 
  • The Adjustment Spread (Retail) is computed based on the average difference between SOR and 3-month SORA compounded-in-advance over the last three months, subject to a floor of zero.
  • You will incur no additional fee or lock-in if you switch to the SORA Conversion Package offered by your existing bank. 
Before (SOR loan) After (SORA Conversion Package)
Reference Rate 1-month SOR, 3-month SOR, or 6-month SOR 3-month Compounded SORA
Loan Margin Your existing SOR loan margin Your existing SOR loan margin + relevant Adjustment Spread (Retail)

Option 2: Other loan packages offered by your bank

You may also choose to take up other loan packages offered by your bank, such as fixed rate property loans or floating rate property loan based on banks’ board rate or fixed deposit rates.

You can switch to any other loan package your bank is offering even if your SOR loan has been automatically converted to the SORA Conversion Package. There will be no fees if you switch before 30 June 2023.

As SOR and the relevant Adjustment Spread (Retail) has risen sharply over the past few months driven by the global rising interest rate environment, other prevailing loan packages which your bank offers could provide more attractive rates.

Using an example (see table below) where the bank is offering a loan package based on 3-month compounded SORA with a 1% spread, you could get a lower all-in interest rate by switching out of the SORA Conversion Package to the prevailing package. You may wish to compare the all-in interest rate and whether there is a lock-in period – to make your decision.

Illustrated example:

  Existing SOR loan  SORA Conversion Package under Automatic Conversion  SORA-based loan packages currently offered by banks
 All-in rate  3-month SOR + your existing loan margin  3-month compounded SORA + your existing loan margin + relevant Adjustment Spread (Retail) as at 1 Sep 2022[1]  The prevailing SORA-based loan packages offered by each bank may differ and change from time-to-time.
 Comparison     

The all-in rate for the existing SOR loan and SORA Conversion Package would be broadly similar at the point of conversion.

 

 

 

 

For a conversion of a 3-month SOR loan to a SORA Conversion Package under Automatic Conversion

 

 

 

 

 

 

 

 

= 3-month compounded SORA + loan margin + 1.33%

 

 

 

 

Even if loan margin = 0%,

 

 

 

All-in rate = 3-month compounded SORA + 1.33%

 

 

 

 Assuming prevailing package by bank currently is:

 

 

All-in rate = 3-month compounded SORA + 1%



[1] Adjustment Spreads as at 1 Sep 2022

  • 1-month SOR to 3-month Compounded SORA: 0.9593%
  • 3-month SOR to 3-month Compounded SORA: 1.3319%
  • 6-month SOR to 3-month Compounded SORA: 1.7073%

Contact your bank to find out more and consider your options.

 

Note

To facilitate industry-wide transition, the Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR) will not need to be re-computed for affected borrowers switching to a SORA package with the same financial institution. If you initiate a refinancing of your property loan with another financial institution (which will be subject to the financial institution's terms and conditions), you should check if any other TDSR exemptions apply. For example, borrowers who are owner-occupiers are exempted from TDSR when refinancing their property loans.

 

For SIBOR borrowers

 

For borrowers on loans that reference 1-month or 3-month SIBOR, there is no immediate impact to your loan as details of your loan conversion will be released in due course, as these benchmarks will only be discontinued after 31 December 2024.

 

Key dates to note

 

30 June 2023 - SOR will be discontinued

31 Dec 2024 - 1-month and 3-month SIBOR will be discontinued

Last updated on 15 Sep 2022