Homeowners, listen up. There’s a new benchmark interest rate in town and you need to hear about it. That’s because…
It has been a long while since the housing loan market had experienced any disruption. Well, that is up until recently when OCBC made a big announcement to introduce a new benchmark interest rate called SORA for pricing housing loans interest rates.
The new benchmark interest rate, Singapore Overnight Rate Average (SORA), was used to price its first private property housing loan in a bid to give homeowners a new option of housing loan to choose from. According to OCBC, the new SORA-pegged housing loan is part of their goal to provide greater stability and transparency for homeowners.
What exactly is this new SORA benchmark interest rate? And how does homeowners benefit from SORA-pegged housing loans? Let’s take a dive into the mechanics behind SORA and how it differs from SIBOR-pegged housing loans.
If you have zero clue about SORA but want to get up to date with everything you need to know about SORA, here’s a quick summary of things you need to know.
|Calculation Methodology||Each bank in Singapore will contribute a borrowing rate to MAS.
MAS will collate and calculate the average borrowing rate across all 20 banks after removing the outliers.
MAS will then publish the SIBOR rate on its website.
|Using a volume weighted approach, the daily SOR is calculated by taking the average SOR on all recorded transactions of Interbank loan involving unsecured funds.
It then takes a x-day (e.g. 90-day) average across the last 90 days using a simple average method.
|Forward Looking vs Backward Looking||Forward Looking||Backward Looking|
|Expert Judgement Required||Yes.
Since SIBOR is forward looking, it requires expert opinion on where interest rate will move in the coming months.
Since SORA is calculated based on all recorded transactions of Interbank loan involving unsecured funds, it doesn’t require any expert judgement. It is a data-driven approach that is open to less subjectivity.
There is no way for homeowners to verify the SIBOR other than checking it on MAS website.
Homeowners can simply calculate their own SORA using the daily published SOR to double check on SORA rates published by the bank.
|Loan Options||More, for now.||
Limited, for now.
|Given that SIBOR is still the go-to benchmark rate, there are limited loan options that are SORA-pegged for now. However, the industry appears to be pretty bullish about SORA.
A consultation paper was recently published by Association of Banks in Singapore (ABS), the Singapore Foreign Exchange Market Committee and the Steering Committee for Sor Transition to Sora, to recommend for SORA to replace SIBOR in the next few years.
The paper cited that SORA is not as volatile as SIBOR, which will benefit both banks and retail customers.
At the moment, OCBC is the only bank that offers SORA-pegged housing loans. Plus, it is only applicable for private property. However, we foresee that other banks like DBS and UOB will soon come up with its own SORA-pegged loan products to compete for market share.
If you are a homeowner, you should be excited about the introduction of SORA.
Firstly, whenever banks introduce new housing loans, there will bound to be a fight between banks to gain market share. That’s where homeowners can stand to benefit from better deals.
Secondly, the introduction of SORA is a sign of change in the housing loan market. SORA could soon become a new norm where homeowners no longer have to worry about sudden fluctuations in the benchmark rate, which can lead to a sudden increase in monthly mortgage repayment.
That being said, homeowners shouldn’t be too quick to jump onto the SORA bandwagon. We foresee better deals to spring up in time to come. If you aren’t in a hurry to refinance, then why not wait for a better deal instead?
While SORA does offer new possibilities for homeowners, let’s not be too quick to discount SIBOR. SIBOR is still a pretty useful benchmark interest rate that can help homeowners to garner a better home loan deal. But how?
Since SIBOR is a forward looking type of interest rate, it works in the favour of homeowners when interest rates are declining. That’s because, unlike SORA, SIBOR allows you to capture declines in interest rates as quickly as possible. It doesn’t come with the kind of 90-day averaging that accompanies SORA.
In that sense, given that we are currently in a declining interest rate environment, it still makes sense for homeowners to seriously consider SIBOR loans for now. Till the moment that interest rates show signs of climbing, homeowners will benefit from sticking with SIBOR-pegged home loans.
Still confused about which benchmark rate housing loan will benefit you the most? Fret not. Moneyline.sg’s team of housing loan experts are always ready to help you alleviate all your concerns. Let us help you analyze your needs for you and provide you with the best recommendation for the type of benchmark rate housing loan that lets you get the most bang for your buck.
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