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    SIBOR vs SOR Rate – What are they?

    If you are hunting for a new office or home in Singapore, and are looking for home or property loans, it is quite likely that you will come across terms like SOR and SIBOR. SOR or Singapore Swap Offer Rate and SIBOR or Singapore Interbank Offered Rate are fluctuating interest rates that impact your home loans directly.

    Floating home loan interest rates

    A floating home loan package is basically a loan offering in which the interest rate is linked to either of these base rates. So when these rates change, the interest rate of your loan would also change, thereby changing the repayment amount.

    The changes seen with Singapore Interbank Offered Rate are mainly based on the Singapore banking market, while Swap Offer Rate is swayed by the more unpredictable global markets – especially the USD exchange and interest rates. In other words, it projects what the rate of interest would be if the same sum were borrowed in US dollars.

    A floating interest rate is normally lower than fixed rate, but this depends on market conditions. You’re likely to be exposed to the risk of mounting interest rates with the floating rate package, which would make your repayments higher. With the fixed rate, your repayment amounts can stay stable for a specific period.

    How do SIBOR and SOR work?

    Right now, only a few banks offer SOR-based home loans in Singapore. While both rates normally lean towards similar directions, Swap Offer Rate is usually more inconsistent than Singapore Interbank Offered Rate.

    SIBOR is managed by the Association of Banks in Singapore or ABS. You can keep a tab on this rate every month on the Association’s website. However, today in Singapore, home loans pegged to SIBOR are more prevalent as volatile markets have caused Swap Offer Rates to fall into negative terrain.

    In Singapore, most banks add a margin on top of these base rates when they offer housing loan packages. So when you procure a home loan, the interest rate will be the SIBOR/SOR rate along with a margin. For instance, a bank may offer a package with an interest rate of 3-month SIBOR + 0.9%. So if the current 3-month SIBOR is 1.1%, the total rate of interest on the loan would be 2%.

    Although Singapore Interbank Offered Rate varies on a daily basis, banks use a monthly rate normally based on the first working day of that month. So if on Thursday, 1 August, the 3-month SIBOR is at 1.02% that would become the current 3-month SIBOR rate for August. SOR can be computed using the formula given below:

    USD/SGD Forward Rate* = USD/SGD Spot Rate** +/- SWAP Points

    {[(Spot Rate + Forward Points/Spot Rate) x (1 + (USD Rate x No. of days/360))]-1} x 365/No. of days x 100

    *Forward Point refers to the difference between the currency exchange rate for the current spot rate and the currency exchange rate for the future spot rate of the relevant transaction.

    **Spot Rate refers to the currency exchange weighted spot rate of all relevant transactions routed electronically via an appropriate broker. However, only transactions that fulfil the minimum estimated amount will be taken into consideration.

    Which one should you choose?

    Choosing between Singapore Interbank Offered Rate and Swap Offer Rate depends totally on your familiarity with the property market and your tolerance for risk. If you invest frequently in property and are aware of your budget, you should simply opt for a SOR package as long as you are not locked-in for a long time.

    By contrast, if you are purchasing a property keeping long-term goals in mind, choosing a fixed-rate loan tied to SIBOR would be a much better choice.

    In the past few months Swap Offer Rate is somewhat lower than the other, so you may get a low-priced loan through it. However, in the past, there have been extended periods of time when the Singapore Interbank Offered Rate was lower. Normally, SOR drops more than the other when rates are falling, but it can also be higher when exchange rates go up.

    At this time, picking between the two is a trade-off between volatility and low rate. You may opt for Singapore Interbank Offered Rate and pay a stable rate of interest on your debt. Or, you could opt for Swap Offer Rate package to save on your interest, but you will have to consider the possibility of an extremely unstable rate of interest that could be higher.

    What are the various tenure options available?

    Not all banks will allow you to select from numerous rate-based tenor options. Most banks in Singapore pick one index and continue with that with no negotiation.

    When it comes to choosing the tenure for these rates, you have several options including 1, 3, 6, 9, and 12-month. When choosing the term, it is essential to keep in mind that shorter terms attract lower rate of interest, but they will change more often. The rate of interest on longer terms will be higher, however it will stay steady during the term.

    For instance, if you have taken a 3-month SIBOR at 0.3% and a 9-month SIBOR at 0.9%, the 3-month SIBOR is very low, but can potentially fluctuate a lot. So if it spikes to 1.4% a few months later, the 9-month SIBOR would have been a better option.

    Are bank Board Rates better?

    When you apply for a home loan, you will have to pick between floating or fixed rate packages. If you pick a floating rate, you will have to choose between an Internal Board Rate (IBR), SIBOR or SOR package that varies as per the bank’s discretion.

    Bankers who try to sell Internal Board Rates will state that the interest rates have remained unchanged for the past decade. However, this does not mean that they would not change it in bad times. As there is no transparency when it comes to the calculation of interest rates and no genuine method of observing the uptrend, if banks choose to raise them at any point, you will be left high and dry with very high rates.

    Moreover, most banks build their Internal Board Rate in such a manner that it remains low for the first couple of years of the loan period, and then go up drastically starting from the third and fourth year. This will normally force you to contemplate on refinancing soon, as when the interest rates go up, they normally reach 2.75% and more.

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