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From SOR to SORA: How your SOR-based home loan will be affected and options available

With the Aug 31 deadline for conversion of SOR-based retail loans nearing, ABS says those impacted should begin weighing their refinancing options

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It’s best to speak to your bank soon. That’s the advice from The Association of Banks in Singapore (ABS) to homeowners who have yet to convert their loan packages pegged to the Singapore Dollar Swap Offer Rate (SOR).

SOR relies on the US Dollar London Interbank Offered Rate (USD LIBOR) in its computation, which will be discontinued after June 2023 as part of global reform efforts to improve the robustness and integrity of financial benchmarks. Accordingly, SOR will also be discontinued after June 30, 2023. Replacing it is the Singapore Overnight Rate Average (SORA), an interest rate benchmark administered and published by the Monetary Authority of Singapore (MAS) since 2005.

"SORA is a reliable, robust and transparent rate that is based on actual borrowing transactions in the unsecured overnight interbank cash market. SORA is used as a reference rate in a variety of financial products such as loans, bonds and derivatives. Banks in Singapore have been offering housing loans that reference SORA since 2020," says Mrs Ong-Ang Ai Boon, director of ABS.

As at end-March 2022, there remained about 5,000 borrowers with SOR-based retail loans. Many customers have already taken the opportunity over the past few years to transition their loans to SORA or other prevailing loan packages offered by banks, taking advantage of the alternative options made available to them.

Options for homeowners

From now till Aug 31, 2022, banks will continue to offer customers a SORA Conversion Package that converts their existing SOR-based retail loans to one that references the three-month Compounded SORA, with no additional fee and no lock-in period. The SORA Conversion Package is designed to minimise differences in interest payments at the point of conversion when customers’ loans are transitioned from SOR to SORA. The three-month Compounded SORA, which is a floating interest rate benchmark, will continue to vary with market conditions.

Customers can also request to be switched to other fixed or floating rate loan packages (including other SORA or board rate loans) offered by the same bank to new customers at no additional fee (if there is no change in maturity), although a lock-in period may apply, adds Mr Lawrence Loh, who heads the Consumer Products Subgroup within the Steering Committee for SOR & SIBOR Transition to SORA (SC-STS). The SC-STS is an industry committee established by MAS in August 2019 to support a smooth transition to SORA.

Given the recent market movements, it may be useful for customers to check if the terms and all-in-rates for such prevailing packages are more attractive and better meet their financial needs. 

Homeowners should contact their bank before end-July 2022 to learn about their loan options, so that the conversion process can be completed by Aug 31, 2022. By consulting their bank early, customers can discuss available options and switch to a loan package that best suits their financial preferences.

If customers' SOR-based home loans are not switched out by Aug 31, 2022, they will be automatically converted to a SORA Conversion Package in October by the respective banks. Customers who decide belatedly that they would prefer to be switched instead to other fixed or floating rate loan packages offered by the same bank to new customers, can still request a free switch from the SORA Conversion Package to these prevailing packages before June 30, 2023. But there will not be retrospective changes to interest payments due between October 2022 and whenever the switch is subsequently made. 

SORA Conversion Package

The SORA Conversion Package that is available at banks comprises three components: the three-month Compounded SORA, the existing SOR loan margin, and an Adjustment Spread (Retail) published by the ABS Benchmarks Administration Co. (ABS Co) that will vary from month to month. 

The three-month Compounded SORA is computed by taking the compounded average of daily SORA over the preceding three months. It is used to smooth out variations that may occur from time to time. 

The Adjustment Spread, meanwhile, is incorporated to make up the difference between SOR and Compounded SORA, since SOR factors in term and credit risks while SORA does not. Reflecting the increases in SOR over the past year relative to SORA, the Adjustment Spread published by ABS Co has similarly been rising. For example, if you had switched your existing three-month SOR-based loan to a SORA Conversion Package in January 2022, the Adjustment Spread (Retail) applied to your loan would have been 0.1517 per cent – much lower than the July 2022 spread of 1.0063 per cent.

Automatic conversion of outstanding SOR-based loans in October 2022

SOR-based retail loans that continue to remain outstanding after Aug 31, 2022, will be converted to a SORA Conversion Package in Oct 2022, as recommended by the SC-STS. 

Elaborating on this, Mr Loh, who heads the Consumer Products Subgroup within the SC-STS, says the conversion of existing SOR-based retail loans is needed to prevent any disruption to such loans when SOR is discontinued next year. Banks will facilitate the move by automatically converting outstanding SOR-based retail loans that remain outstanding after Aug 31 2022 to a SORA Conversion Package, but he encourages customers to be actively engaged in this process, and take the opportunity to review their options and select a package that is best aligned with their financial preferences and needs. 

“Given the rising global interest rate environment, it is advisable that customers have a thorough discussion with their banks as soon as possible to ensure that they are choosing the right package for their personal financial requirements,” Mr Loh says.

Learn more about how the transition to SORA will affect you. Contact your bank today.

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