In the next three years, thousands of floating-rate property loans worth billions of dollars will have to be switched to a new loan package.
This is because they are based on two legacy interest rate benchmarks, the Singapore Dollar Swap Offer Rate (SOR) and the Singapore Interbank Offered Rate (SIBOR), which are both being phased out.
Banks in Singapore have begun the process of converting all existing SOR-based property loans. They plan to complete this process by October 31, 2022, in preparation for the discontinuation of SOR after June 30, 2023. Borrowers with loans pegged to SIBOR will similarly need to convert their loans in due course, as the key SIBOR reference rates will be discontinued after December 31, 2024.
Moving forward, the Singapore Overnight Rate Average (SORA), administered by the Monetary Authority of Singapore (MAS), will become the main interest rate benchmark in Singapore financial markets. As of April 30, 2021, S$4.2 billion1 worth of SORA-pegged retail and institutional loans have been issued and adoption is expected to accelerate in the coming months.
What are SOR and SIBOR?
SOR and SIBOR have served as the main benchmarks for floating-rate loans in Singapore over the past 20 to 30 years. Both rates are administered by The Association of Banks in Singapore Benchmarks Administration Co. (ABS Co.).
SOR, which is used mainly in commercial loans, represents the effective cost of borrowing Singapore dollars (SGD) synthetically, by borrowing US dollars (USD) and converting them to SGD through the foreign exchange market. As SOR uses the USD London Interbank Offer Rate (LIBOR) in its computation, it will be discontinued after June 30, 2023 together with USD LIBOR.
SIBOR represents the average cost a bank expects to pay another bank in order to borrow SGD. It is calculated based on daily submissions by a panel of contributor banks, and may not always be fully backed by transactions.
As such, in line with global reforms to improve the robustness and integrity of financial benchmarks, the Steering Committee for SOR & SIBOR Transition to SORA (SC-STS), an industry-led steering committee established by MAS, assessed that it would be appropriate to move away from SOR and SIBOR, towards SORA.
Since May 1, 2021, banks have ceased using SOR in new loans and securities maturing after end-2021. Banks will also stop using SIBOR in new loans from October 1, 2021.
To help existing retail borrowers to switch out of their SOR-based loans, banks will offer these borrowers a SORA Conversion Package that is designed to minimise differences in interest payments at the point of conversion.
Besides the SORA Conversion Package, borrowers can also choose to convert their SOR-based loans to either fixed-rate loans or loans pegged to other reference points such as the interest paid on fixed deposits.
Mrs Ong-Ang Ai Boon, director of ABS, says: "Banks have been preparing over the last two years to ensure a smooth transition of the interest rate benchmarks from SOR to SORA for all customers. We trust that it will be a seamless switch over to SORA for most customers."
Global reforms of interest rate benchmarks
Regulators and banks in major economies are also moving towards alternative interest rate benchmarks that are similar to SORA.
In the US, banks will transition from using USD LIBOR to the Secured Overnight Financing Rate (SOFR), which is based on transactions in the overnight repurchase agreement (repo) market. In the UK, banks will transition from using Sterling (GBP) LIBOR to the Sterling Overnight Index Average (SONIA), which is based on transactions in the sterling overnight market.
What is SORA?
SORA, which has been administered by MAS since 2005, is the volume-weighted average borrowing rate in Singapore's unsecured overnight interbank cash market. Unlike SIBOR, which is based on estimates from Singapore banks, SORA is based on transaction data.
"SORA is a reliable, robust and transparent rate as it is fully backed by overnight interbank cash market transactions," adds Mrs Ong-Ang.
Interest payments based on compounded SORA rates tend to be less volatile, because the calculation is based on interest rates over a period of time. As banks' SORA-based loan packages typically use such compounded SORA rates, customers will benefit from more stable and predictable loan servicing costs from month to month. In contrast, loans based on SIBOR and SOR are determined by rates on a single day and could be exposed to abrupt changes if the rates on that particular day fluctuated.
Mrs Ong-Ang says:"Interest rate benchmarks provide good reference to set the cost of credit and price products, among others. SORA is a robust rate that customers can trust and rely on."
Click here to learn more about SORA and get the latest updates on Singapore's interest rate benchmarks.
What are SOR, SIBOR and SORA, and how are they different?
The figures used in these charts and examples are simplified and meant for illustrative purposes only.
This is the first of a four-part series on Singapore's transition to SORA, the new interest rate benchmark in Singapore.