Understand SIBOR and SOR when it comes to your home loan package
SIBOR and SOR are floating interest rates that directly affect your home loan packages.
Having an understanding at least basics about these rates can go a long way when it comes to your home loan packages. Here’s guide to help you better understand SIBOR and SOR.
By Paul Ho
In the world of home financing, hundreds of acronyms abound. Knowing what they stand for and how they affect your home loan is just as important as all other aspects of property purchase.
Among the acronyms commonly stumbled upon are SIBOR and SOR.
SIBOR, which stands for Singapore Interbank Offered Rate, and SOR – or Singapore Swap Offer Rate – are floating rates that have a direct impact on certain home loan packages. However, what do these rates represent and how do they affect one’s home loan package?
What is SIBOR?
The Singapore Interbank Offered Rate or SIBOR is the rate at which banks loan from one another.
When one bank borrows, it means another bank deposits funds with it. These deposit rates are then reported based on the following maturity, in Singapore dollars:
- 1 Months
- 3 Months
- 6 Months
- 12 Months
At least 12 banks need to submit rates for each maturity date for the day’s rates to be valid. In the case where more than 12 banks reported their rates, the reported rates are then ranked from highest to lowest with the top and bottom quartile removed. The remaining transactions are considered valid and will be averaged to obtain the SIBOR rate for the day.
According to PropertyGuru’s Mortgage Guides, SIBOR-pegged home loans are typically bundled as SIBOR plus a spread – a premium charged by financial institutions. As SIBOR is a standard rate floating rate, banks differentiate their SIBOR packages by offering different spreads and incentives, such as reduced fees during the lock-in period.
Although SIBOR changes daily, banks use a monthly SIBOR typically based on the first business day of that month. Therefore, if the three-month SIBOR is 1.0 percent on the first business day of the September, the prevailing three-month SIBOR rate for September is 1.0 percent.
In addition, if a bank’s spread is at 0.5 percent, the three-month SIBOR package will be calculated as follows:
1.0 percent + 0.5 percent = 1.5 percent
where: 1.0 is the SIBOR; 0.5 is the spread and 1.5 is the loan’s total interest rate.
What is SOR?
The Singapore Dollar (SGD) Swap Offer Rate or SOR, according to the Association of Banks in Singapore, is the simulated rate for deposits in SGD based on the foreign exchange rate with US Dollar (USD).
In simple terms, the rate is based on the expected forward exchange rate between the US dollar and Singapore dollar.
The rate is calculated and determined as follows:
Spot Rate is the currency exchange weighted spot rate of all qualifying transactions electronically routed through an approved broker. Only trades that meet the minimum notional amount will be counted.
Forward Point is the difference between the spot rate (or currency exchange rate) for the near leg and the forward rate (or currency exchange rate) for the far leg of that qualifying transaction.
When banks swap a currency, say SGD into USD and back, they agree on the current spot rate (Near Leg) and a future spot rate (Far Leg). The Forward point is then calculating by subtracting the Far Leg from the Near Leg.
For example, if the Near Leg stands at 1.3514 and the Far Leg is at 1.3507, the Forward Point is 0.0007.
USD rate is the rate for deposits in US Dollars for a period of the calculation time frame (# Days). This rate is published daily on the Thomson Reuters Screen LIBOR01. For example, you are calculating for 3-month maturity period; then you will take the USD Rate for the similar 3-month maturity.
How did these rates behave against the US-Dollar-versus-Singapore-Dollar exchange rate?
Figure 1 shows how SOR and SIBOR fared against the exchange rates recorded from January 2012 to August 2016.
1. This shows that as the SGD strengthened against the USD, SOR trended lower in anticipation of a strong SGD.
2. This shows that despite the slight strengthening of SGD versus USD, the market deemed the currency direction as neutral. Therefore, SOR tracks SIBOR closely.
3. Here shows that the market expects Singapore dollar to continue to be strong against the US Therefore SOR was lower than SIBOR.
4. During this time, the looming Federal rate hike and the US economy’s recovery as reflected by the drop in employment rate pushed the US dollar to gain. This resulted to the US dollar strengthening against the Singapore dollar, which then resulted to SOR trading higher than SIBOR.
5. As the US economy recovered further, the market continues to expect the US dollar to strengthen against the Singapore dollar, as the SOR trades higher than the SIBOR. This time, however, the US dollar only slightly appreciated against the local currency.
6. On 14 April 2016, Monetary Authority of Singapore (MAS) adopted a neutral currency stance—setting the S$NEER policy band at zero percent. This means that Singapore dollar will neither appreciate nor depreciate against its trade-weighted basket of currencies.
This means that there is more likelihood that the US dollar will strengthen against the Singapore dollar as the US is on a recovery path while the rest of the world is slowing down. However, despite the central bank’s neutral stance in currency appreciation, the Singapore dollar still strengthened against the greenback leading to SOR trading lower than the SIBOR as shown.
Which rate should I choose for my home loan?
SIBOR, in theory, is correlated to the domestic market conditions while SOR is more receptive to market activities the American or global market.
SIBOR and SOR moves in tandem meaning when SIBOR is on the up, so will SOR be; when SIBOR falls, so will SOR. However, it is noted that both markets have different level of volatilities given the difference in the market they are tied to.
Given that Singapore’s market is less volatile than other markets, it is easy to assume that SIBOR is less volatile than SOR. SIBOR changes in small movements while SOR’s variations change dramatically—which, for an average borrower, works in both ways.
Simply put, the main thing to know about SOR is that its volatility generally means better rates than SIBOR when it plummets, and higher rates than SIBOR when it peaks. As a result, SOR loans traditionally appeal less to the risk-averse borrowers and more to borrowers with greater risk appetites.
But in the end, SIBOR and SOR tend to hover at the same rates for long periods of time. Therefore, determining which floating rate to choose for your home loan is all about knowing how much risk you are willing to take for the duration of your loan.
Paul Ho is the founder of www.iCompareLoan.com