By 2024, existing retail borrowers on Singapore Interbank Offered Rate (SIBOR) loans will need to make the switch to a new loan package, as the Singapore Overnight Rate Average (SORA) replaces SIBOR as the new key interest rate benchmark. What does this mean for your loan?
A significant change is on the horizon for interest rates. By 31 December 2024, banks in Singapore will fully phase out the Singapore Interbank Offered Rate (SIBOR) in favour of the Singapore Overnight Rate Average (SORA).
SIBOR is a benchmark interest rate for lending between banks in the Asian market, to which financial products, such as property loans, are pegged. The shift to SORA is part of a global effort to improve the integrity of financial benchmarks, with SORA set to increase the reliability and transparency of interest rates.
Similar to when the Singapore Dollar Swap Offer Rate (SOR) was phased out in 2023, this move will impact existing loans. Before getting into the implications, let’s take a look at the key differences between SIBOR and SORA.
SIBOR vs SORA
SIBOR has been the primary interest rate benchmark in Singapore for over three decades. It is a daily rate calculated based on submissions by a panel of contributor banks, which reflect the rates at which banks could borrow funds on the interbank market.
In other words, SIBOR is a forward-looking term rate based on estimates from Singapore banks. In contrast, SORA is a backward-looking rate calculated based on transaction data from the overnight interbank lending market.
It is computed by taking the volume-weighted average of eligible transactions in the market in accordance with international best practice. SORA rates are published on the Monetary Authority of Singapore’s website daily at 9am.
One of the chief benefits of SORA being anchored on actual transactions is that it makes interest rates less susceptible to fraud and manipulation – which means more transparent and stable interest rates for SORA-linked property loans.
What’s next for my loan?
Banks are striving to make the switch as hassle-free as possible for customers. For existing retail customers who are currently servicing property loans pegged to SIBOR, a number of options are on the table to facilitate a smooth and easy transition.
The first option is to switch to a prevailing loan package. Choose a fixed rate package to take advantage of stable interest rates, especially during economic downturns. Alternatively, you can opt for a floating rate package, which will be pegged to SORA rates compounded over a period of one month or three months. This allows you to benefit when interest rates are low.
Another option is to switch to a SORA Conversion Package (SCP), which you can do during the active transition period from September 1, 2023 to April 30, 2024. This conversion will be automatic in June 2024 for all remaining SIBOR-pegged loans.
The SCP seeks to directly convert your existing SIBOR-based loan to a SORA-based loan by applying an adjustment spread to account for the difference between the two.
The adjustment spread during the active transition phase is determined each month as the average spread between SIBOR and SORA rates compounded over the preceding three months.
Stay abreast of interest rates
For retail customers who have their loans automatically converted in June 2024, the adjustment spread will be fixed at 0.2426 per cent and 0.3571 per cent for one-month and three-month SIBOR to 3-month Compounded SORA.
These figures were derived from the five-year historical median spreads between 2018 and 2023.
As you decide your next course of action, keep an eye on interest rates. For instance, if they continue to rise throughout 2024, it may be wise to make the switch earlier to avoid being locked in to a less favourable adjustment spread.
Ensure a seamless transition for your loan. Contact your bank early to discuss your options and find out more here.
the bottom line:
Do some research to find out which loan package best serves your needs as interest rates transition from SIBOR to SORA.