SIBOR when expanded is ‘Singapore Interbank Offered Rate’. This is a daily reference rate that is calculated on the basis of the interest rates that banks in Singapore incorporate when they offer unsecured funds to other banks in, as the name suggests – ‘interbank’ market or also known as Singapore wholesale money market. It is along the lines of Euribor (Euro Interbank Offered Rate) or LIBOR (London Interbank Offered Rate). This rate has been set by ABS or the Association of Banks in Singapore. This is a transparent rate that gives you the information regarding what the cost of banks borrowing from one another is.
Thompson Reuters help the ABS compile this rate. Every day, they compile the rates from 17 different banks and then rank them. Then, the top and the bottom of the quartile are automatically eliminated. After this, the remaining banks on the list, which are a minimum of 8 each time are compared to get an average. The end result of this forms the SIBOR for the day.
SIBOR and SOR are not the same or interchangeable. SOR is Singapore Swap Offer Rate. SOR is calculated using a formula that contains both the USD and SGD. The forward rate and the spot rate of USD and SGD are used to calculate SOR. Simply put, SOR is based on the foreign exchange rate with the US$. By making this comparison, SOR tells you what will be the interest rate if the same amount was borrowed in USD. Therefore, the SOR rate is directly proportional and dependent on the state of the US economy. Hence, not many banks in Singapore today offer home loans on the basis of the SOR rate. Majority of the home loans that are offered in Singapore are based on SIBOR. It is a preferred rate for home loans than SOR and much more popular as well.
The SOR is derived using the following formula –
US$ / SG$ Forward rate = US$ / SG$ Spot rate +/- SWAP points
SIBOR has tenures that are typically ranging at 1 month, 3 months, 6 months or 12 months at the end of which the borrowing bank has to return all the money borrowed from the lending bank. This helps determine the SIBOR rates for 1 month, 3 months, 6 months or 12 months respectively that are employed by the banks in Singapore at which they offer home loans to their consumers.
Both, SIBOR as well as SOR rates are expressed as a percentage that are constantly updated. 1 month and 3 months updating are the most common for home loans in Singapore. Having said this, it is not uncommon to see home loans offering 2 months to 12 months format as well. Apart from the percentage, the SIBOR also contains the number of month (s).
For example, see below how the SIBOR for 1 Month will be reflected (the values given below are only for illustrative purposes) –
1 Month SIBOR – 0.135%
Refer the following current rates for SIBOR and SOR as per October 5th, 2015, 3 PM (Singapore Time)
|Tenure||S$ SIBOR||S$ SOR|
|12 Months||1.31434||Not Applicable|
Your complete home loan interest will be calculated on the basis of SIBOR or SOR, depending on which rate the bank operates on, along with adding the fixed charges of the bank to this rate. The rate of SIBOR or SOR are readily available online and are extremely transparent, however, the charges of the bank are decided as per the discretion of the bank and may not be disclosed to you. But, depending on your financial status, the loan amount and the loan tenure, the bank will tell you what will be your interest rate structure for the home loan. Due to the transparency of the SIBOR rates, many banks base their floating interest rate structures offered on the basis of the current SIBOR rates.
For example, find below the interest rate structure for your home loan tenure offered by a bank
Note- All values mentioned below are only for illustrative purpose to better your understanding
Interest Rate Package including SIBOR
1st Year – 3 Month SIBOR (1.13508) + 0.55%
2nd Year – 3 Month SIBOR (1.13508) + 0.65%
3rd Year – 3 Month SIBOR (1.13508) + 0.76%
4th Year (continuing) – 2 Month SIBOR (1.13508) + 1.35%
Both SIBOR and SOR are determined on the basis of completely different factors. SIBOR is directly impacted by Singapore’s market situation and conditions that affect it because it depends on the exchange of funds between banks within Singapore to determine the rate. SOR, on the other hand, is impacted by the American market conditions i.e. condition of the global market. It is common knowledge that the American or the global market is more likely to fluctuate than the Singapore economy. As both the rates directly depend on the market conditions of the said above, the SIBOR rate is relatively more stable than the SOR rate.
You should also know that SIBOR and SOR rates are also directly proportional to each other, if there is an increase in the SOR rate, even the SIBOR rate will increase and if there is a decrease in the SOR rate, even SIBOR will fall. However, due to the economies that these two depend on for their rates, since the Singapore economy is more stable than the American economy, if the SOR rate falls, the SIBOR rate will also fall, but the dip will be significantly lesser compared to the former. At the same time, there is also the tendency for the SOR rate to rise significantly higher and faster than the SIBOR rate, hence making it difficult to judge.
As previously stated, there are certain banks that offer interest rates based on the SIBOR rate and some that base their interest rate on the SOR rate. One way would be to do your own research and find out which banks are offering what rates and then deciding which one will be more suitable for your financial situation. Another way would be to find loan comparison websites that do the research for you and give you the information on all available packages currently in the market and also tell you which banks operate on what rate, SIBOR or SOR. Lastly, you could directly contact the bank or pay a personal visit and get all the information first hand in order to avoid any disparity.
Home loan or mortgage loan customers in Singapore will have a little difficulty in coping with their installment payments, if we are to believe what the analysts at OCBC say about the increase of SIBOR. The analysts with OCBC bank are of the opinion that SIBOR will hit more than 2 percent by the end of 2016 and in such a scenario the interest rates for home loans and other loans that are linked to this rate will increase. As a result, the installment payments of the customers will also increase and they might find it difficult to manage their monthly budget and finances.
SIBOR stands for the Singapore Interbank Offered Rate and it is a reference rate that is used by banks to determine the interest rate at which they will offer their different loan products to the customers. The rate can change on a regular basis. There are many factors that influence this rate and these factors include the rates offered by the US Federal Reserve, the strength of the Singapore Dollar and so on. According to Selena Ling, the head of treasury research and strategy at OCBC Bank, both the Singapore Interbank Offered Rate and Swap Offer Rate will increase further with time as a result of the prevailing market conditions.
Most of the banks in Singapore offer home loan and other loan products with different interest rate packages that are linked to SIBOR and so many Singaporeans are affected when SIBOR increases.
26th November 2015