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askST: What should I do about my existing SOR-based retail property loans?

Banks in Singapore are encouraging customers with SOR-based retail property loans to contact their banks early to explore their options, as SOR will be discontinued after June 30, 2023

Aerial view of commercial properties in Singapore
If you do not switch out by Aug 31, 2022, your SOR-based retail property loan will be automatically converted to a SORA Conversion Package in October by your bank. PHOTO: GETTY IMAGES

If you have an existing retail property loan that references the Singapore Dollar Swap Offer Rate (SOR), you would have heard about the impending discontinuation of SOR by now.

Banks in Singapore are in the process of converting all existing SOR-based property loans, as SOR will be discontinued after June 30, 2023.

This is because SOR relies on the US Dollar London Interbank Offered Rate (USD LIBOR) in its computation, and USD LIBOR will cease after the same date as part of global reform efforts. The Singapore Interbank Offered Rate (SIBOR), another legacy interest rate benchmark, will be discontinued after Dec 31, 2024.

Both SOR and SIBOR will be replaced by the Singapore Overnight Rate Average (SORA) – Singapore’s key interest rate benchmark.

Meanwhile, global interest rates are rising. This has led to higher interest rates for all loans in Singapore, including property loans.

What should you do about your existing SOR-based retail property loans now? How will rising interest rates affect your loan conversion from SOR to SORA?

Here’s what you should know.

Q: I have an existing SOR-based retail property loan. How will the transition to SORA impact me?

A: All existing SOR retail loans will be converted to an alternative loan package in October 2022 to prevent customers from being inconvenienced by the discontinuation of SOR.

If you do not switch out by Aug 31, 2022, your SOR-based loan will be automatically converted to a SORA Conversion Package in October by your bank. You should contact your bank before end-July 2022 to learn about your alternative loan options, so that the conversion process can be completed by Aug 31, 2022.

Q: What is the SORA Conversion Package?

A: The SORA Conversion Package is designed to minimise differences in interest payments at the point of conversion from SOR to SORA.

It is based on the three-month Compounded SORA, which is computed by taking the compounded average of daily SORA over the preceding three months.

The three-month Compounded SORA is used in the SORA Conversion Package, says the Association of Banks in Singapore (ABS), as it is more stable than the one-month Compounded SORA and less lagged than the six-month Compounded SORA. It is also the most common tenure setting in SORA loan packages offered by banks in Singapore, adds the ABS.

The SORA Conversion Package will include a standardised adjustment spread – Adjustment Spread (Retail). The adjustment spread will be fixed for the remaining tenure of the loan.

The Adjustment Spread (Retail) is needed because of fundamental differences between SOR and SORA. For example, SOR factors in term and credit risks while SORA does not.

You can find the updated adjustment spread rates on ABS’ website on the first business day each month.

Do note that the three-month compounded SORA – which is a floating interest rate benchmark – will continue to vary with market conditions.

Q: What are the benefits of using compounded SORA?

A: The averaging effect of compounded SORA will help to smooth out day-to-day fluctuations in interest rates, providing for more stable interest payments.

The use of compounded-in-advance SORA in loans means that any change in market conditions will not be immediately reflected in your loan rate, as it refers to interest rates from an earlier period.

An in-advance approach will result in slower increases in interest payments in a rising interest rate environment, and slower decreases in a falling interest rate environment. This also allows you to know your repayment amount in advance, so you can plan your finances accordingly.

Q: How will rising interest rates affect my conversion from a SOR to SORA-pegged loan?

A: Since October 2021, the Adjustment Spread (Retail) has been on a rising trend driven by the rising global interest rate environment. All else being equal, a lower Adjustment Spread (Retail) will benefit customers, as this spread is fixed for the remaining tenure of your loan once applied at the point of conversion.

For example, if you had switched your existing three-month SOR loan to a SORA Conversion Package in January 2022, the Adjustment Spread (Retail) applied to your loan would be 0.1517%.

On the other hand, if you had switched in June 2022 instead, the Adjustment Spread (Retail) applied would be 0.7705%.

Banks in Singapore strongly encourage their customers to switch out of their SOR-based loans early, and contact their banks to discuss the different available options.

When you switch out of your SOR loan on or before Aug 31, 2022, you also have the flexibility to select a property loan package of your choice, whether it is a fixed-rate or floating rate package.

Q: If SOR will only be discontinued next June, why should I make the switch to SORA or an alternative loan package now?

A: Although SOR will only be discontinued after June 30, 2023, you should contact your bank early to explore your options, given the rising interest rate environment.

By proactively switching out of your SOR-based property loan before Aug 31, 2022, you will be able to choose your preferred alternative retail loan package. This could be the SORA Conversion Package, or any prevailing loan packages offered by your bank, including a fixed-rate loan package.

Q: I have not heard from my bank about the need to switch to SORA. Can I wait for my bank to contact me?

A: If you have a retail property loan that references SOR, you should have received a letter from your bank about the need to switch to SORA, along with an FAQ document.

If you have not received this letter, you are strongly encouraged to contact your bank as soon as possible to discuss your options and switch out of your SOR-based loan, so that the conversion can be completed by Aug 31, 2022.

Q: What are my options besides SORA? Can I convert my SOR-based loan to a fixed rate loan package offered by my bank instead?

A: You can choose to convert your existing SOR loan to any other prevailing packages offered by your bank. You should approach your bank to find out more about the various options available, as the prevailing loan packages offered by each bank would be different.

Q: What will happen if I do not switch out of my existing SOR-based loans before SOR is discontinued?

A: If you have a retail property loan that references SOR, you will need to switch out to another loan package by Aug 31, 2022. This is to prevent you from being inconvenienced by any possible disruption to your loan when SOR ceases after June 30, 2023, such as if the interest on the loan cannot be computed.

If you continue to service your loan via your existing or other payment arrangements with your bank, and do not switch out of your SOR-based loan by Aug 31, 2022, your bank will treat your conduct as showing your clear intention to continue your existing loan arrangements with them.

Your SOR-based loan will be automatically switched to a SORA-based loan with no lock-in period (“Automatic Conversion”) in October 2022, or any other date in October as decided by your bank. You can find this information in the letter sent by your bank in March or April, together with an FAQ document.

The SORA-based loan package under Automatic Conversion resembles the SORA Conversion Package, but the date of the Adjustment Spread (Retail) applied will be different. Under the Automatic Conversion, the loan will reference the Adjustment Spread (Retail) published as at Sept 1, 2022, while under the SORA Conversion Package, it will reference the Adjustment Spread (Retail) published in the month of which you convert your loan.

Q: What if I change my mind after switching to SORA? Will there be a lock-in period or additional cost involved?

A: After switching to the SORA Conversion Package, you can switch again on or before June 30, 2023 to other loan packages offered by your bank at no administrative fee.

This was produced in partnership with The Association of Banks in Singapore

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