What is SORA rate and how could it work for you?
Whether you are searching for a new home or simply browsing, chances are you will come across some version of this term: SORA home loan. What is SORA rate, how does it compare with other benchmark interest rates, and what does SORA mean for your home search or refinancing?
What is SORA and how is it calculated?
SORA (which is the Singapore Overnight Rate Average) is the volume-weighted average rate of actual borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore. It is administered by the Monetary Authority of Singapore (MAS), and published at 9am on the next business day in Singapore.
The phrase “volume-weighted average” sounds daunting, but it simply means that the calculations consider the actual amount being lent.
Think of it this way: when calculating SORA, the interest rate for a S$100 million transaction is 5 times more important than the interest rate on a S$20 million transaction.
Why all the fuss over SORA? Well, it is the new benchmark interest rate introduced by the MAS that will replace the Singapore Interbank Offer Rate (SIBOR) and Swap Offer Rate (SOR) when they are phased out by 2024. Even if you have an existing home loan that is pegged to the SIBOR or SOR, you will have to switch over to a SORA-based one if your loan period ends after that.
What is the difference between SORA vs SIBOR home loans
Both SORA and SIBOR are floating rates. The versions most used by banks for their floating home loans packages are the 3M Compounded SORA and 3M SIBOR.
Here’s how they compare:
Comparison of what to expect with 3M Compounded SORA and 3M SIBOR rates
| 3M Compounded SORA | 3M SIBOR | |
|---|---|---|
| What is it? | Average of SORA rates published in the last 3 months. SORA is the volume-weighted average rate of actual borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore. |
Average of SIBOR rates published in the last 3 months. SIBOR is the average rate that Singapore banks forecast that they can borrow money from each other via the interbank market. No transaction needs to have actually happened. All that matters are the rates that the Association Bank of Singapore’s (ABS) 20 member banks think they can get. |
| How is it calculated? | Reporting banks provide data on all eligible transactions traded and booked in the window between 8am and 6.15pm (both timings inclusive). MAS validates the data and calculates the volume-weighted average rate of all eligible transactions. |
ABS’ 20 member banks are polled for interbank lending rates that they expect to get if look for a loan just before 11am Singapore time. These rates are ranked in order, the top and bottom quartiles are removed, and the remaining rates are then averaged. |
| When is it published? | SORA rates are published daily on the Monetary Authority of Singapore’s (MAS) website at 9am | SIBOR rates are published on The Association of Banks in Singapore’s (ABS) website only 7 days later |
| Type of interest rate | Floating; based on yesterday’s actual interbank lending transactions | Floating; based on a poll of rate forecasts by the ABS’ 20 member banks |
Other considerations when deciding on SORA-based home loans
Whether you are buying a new house or thinking of refinancing, the SORA-based home loans presents another choice for you. But because there are other types of home loans available, these are some other factors to consider before signing up for a SORA-based home loan package.
- Affordability
Planning ahead is especially important when it comes to buying a big-ticket item like property. Choosing a home loan package with a lower interest rate can save you money on the monthly mortgage instalments.
In addition, the floating nature of SORA means that you will need to ensure that you can afford to pay off the monthly mortgage even when interest rates fluctuate.
(Read more: Your no-nonsense guide to home affordability in Singapore)
- Fixed or Floating Rates?
Broadly, home loans are based on two types of interest rates: Fixed and floating.
With fixed rate packages, you repay the loan at the same interest rate for the first few years. If you prefer certainty in budgeting for your monthly instalment payment, a fixed interest rate could work better for you. The caveat is that fixed interest rates are usually slightly higher compared to floating rate packages, because you are paying for certainty.
With floating rate packages, you will need to be prepared for any changes in the reference interest rates. When the reference rate goes up, your monthly instalment payment will increase. Similarly, when the reference rate goes down, your monthly instalment amount will also decrease.
(Read more about fixed or floating rates; and the top 5 things you need to know about home loans.)
Ready to start?
Curious to know how much you could potentially save by refinancing your home loan? You can do this easily using the DBS/POSB schedule payment calculator, which gives you an idea of what the monthly payments could look like. You even get a preview of your monthly repayments under a fixed-rate loan or floating rate loan. Why wait? Try it now.
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