SORA is a benchmark interest rate used to market various financial products, including housing loans. This rate can impact the interest rate charged on home loans, as it is used as a benchmark by banks when setting interest rates for home loans.
When SORA rates rise, it becomes more expensive for banks to borrow funds in the interbank market, and as a result, they may increase the interest rate charged on home loans to compensate for the higher cost of funds.
Conversely, when SORA rates fall, it becomes cheaper for banks to borrow funds, and they may decrease the interest rate charged on home loans.
If you plan to get a home loan, staying informed about changes in SORA rates and other economic indicators is crucial. This article will help you get familiar with the SORA benchmark and how it could affect your home loan and borrowing decisions.
What is SORA?
SORA, or the Singapore Overnight Rate, Average is defined as the volume-weighted average of borrowing transactions in Singapore’s unsecured overnight interbank SGD cash market between 8:00 a.m. and 6:15 p.m.
This interest rate benchmark was introduced by the Monetary Authority of Singapore (MAS) in 2020 as a replacement for the benchmark rate SIBOR (Singapore Interbank Offered Rate) and SOR (Singapore Overnight Rate). This change aims to provide a more robust and transparent benchmark rate for loans, bonds, and other derivatives.
How Do SORA Rates Affect You?
The exact impact of the SORA rate in 2023 on home loan borrowers is challenging to predict, as it will depend on various factors, including the overall economic conditions, credit risk, and monetary policy.
However, it is clear that if SORA rates continue to rise in 2023, financial institutions may also increase the interest rate charged on home loans resulting in higher monthly mortgage payments for home loan borrowers.
Depending on the current rates, borrowers may consider managing their home loans by fixing their interest rates for a specified period to help manage the risk of rising interest rates.
Current SORA Rates
The 1-month SORA is currently at 3.43%, while the 3-Month SORA is at 3.15%. In March 2022, the 1-month SORA rate was 0.30%, while the 3-month SORA rate was 0.25% only. The rates are significantly higher than early last year’s, reflecting the impact of the Covid-19 pandemic and other factors like inflation and global economic conditions.
1-Month Compounded SORA Vs. 3-Month Compounded SORA
SORA rates come in three tenures: 1, 3, and 6-month; but the most common forms are the 1-month, and 3-month compounded SORA.
- 1-Month Compounded SORA
The 1-Month Compounded SORA represents the average rate banks can borrow or lend funds overnight in the Singapore interbank market, compounded over one month. It is the reference rate for pricing short-term financial products such as overnight deposits and short-term loans.
- 3-Month Compounded SORA
3-Month Compounded SORA represents the average rate banks can borrow or lend funds overnight in the Singapore interbank market, compounded over three months. It is the reference rate for pricing medium-term financial products such as three-month deposits and medium-term loans.
In summary, 1-Month Compounded SORA is used for shorter-term financial products, while 3-Month Compounded SORA is used for medium-term financial products.
How is SORA Computed?
SORA is computed based on the volume-weighted average of all SGD overnight cash transactions that took place in the interbank market for the particular day, according to MAS.
It is computed using actual market transactions in the Singapore interbank market. The calculation is based on the interest rates banks charge on overnight borrowing and lending transactions, considering the volume of transactions and the credit quality of the counterparties.
SORA rates for a given business day are published at 9:00 a.m. daily and can be found through the MAS website and third-party redistributors such as Bloomberg and Refinitiv.
The SORA rate is the volume-weighted average rate of borrowing transactions in Singapore’s unsecured overnight interbank SGD cash market between 8:00 a.m. and 6:15 p.m. Reporting banks provide data and are required to submit daily all eligible transactions traded within this time window.
MAS conducts thorough data validation checks and computes the SORA rate daily, wherein the average is based on all eligible transactions. This calculation is done daily, and the average daily rates over a given period is used as the benchmark SORA rate.
However, this calculation takes into account a range of factors, such as:
- Supply and demand of funds in the interbank market
- Credit risk of counterparties
- Overall financial stability of the market
Taking all these into account makes SORA a more robust and transparent benchmark rate than the previously used SIBOR and SOR, which were based on subjective assessments and limited transaction data.
|Months for SORA(first business day of a month & in reverse order)||Compounded 1-Month SORAs||Compounded 3-Month SORAs|
The SORA rate forecast is private as it is based on market conditions that are subject to change and, therefore, difficult to predict. However, market participants can monitor the daily SORA rate and make informed decisions based on current market conditions and expectations for future interest rate changes.
It is important to note that while SORA is anchored to the MAS’ policy rate, the rate can still fluctuate based on market conditions and the supply and demand of funds in the interbank market. As such, market participants should monitor SORA regularly and be prepared for potential changes in the benchmark rate.
Additionally, borrowers will be notified of any revisions made to your monthly instalments, if any.
While the exact SORA rate forecast is uncertain, market participants can make informed decisions based on current market conditions and expect the rate to be influenced by changes in the interbank market and the MAS’s policy rate.
SORA-Pegged Home Loans
|Banks||SORA types||1st Year||2nd Year||3rd Year & after that||Loan details|
Good to Know: What are SIBOR and SOR?
SIBOR (Singapore Interbank Offered Rate) and SOR (Singapore Overnight Rate) were the benchmark interest rates used in Singapore before the introduction of SORA.
SIBOR represents the rate at which banks offer loans to one another in the interbank market. It was used as a reference rate for pricing financial products such as floating-rate loans and financial derivatives in the country. SIBOR was based on subjective assessments of banks and was subject to manipulation.
On the other hand, SOR represents the rate at which banks lend and borrow overnight funds in the market. It was used as a reference rate for pricing overnight deposits and lending in Singapore. SOR was also based on limited transaction data and was not as transparent as SORA.
Why is SORA Replacing SIBOR and SOR?
SIBOR and SOR were the benchmark interest rates used in Singapore before the introduction of SORA but were replaced due to concerns about robustness and transparency. Anchored to the MAS’s policy rate, it provides greater certainty to market participants. Other benefits which make SORA a more reliable and credible benchmark rate for the country are:
SORA rates are based on actual transactions in the interbank market, are published daily by the MAS, and reduce subjective assessments.
SORA rates are based on overnight transactions, which are less volatile than longer-term transactions and reduce the risk of sudden spikes or drops in interest rates.
Improved Price Discovery
The accurate reflection of the actual cost of funds in the interbank market improves price discovery and reduces the risk of manipulation in the benchmark-setting process.
Enhanced Market Liquidity
By relying on actual transactions in the interbank market, SORA rates can enhance market liquidity and encourage greater participation in the market.
Changes in SORA rates can impact the interest rate charged on home loans and, therefore, on borrowers’ monthly mortgage payments. As such, borrowers should stay informed about changes in SORA rates and consider options for managing their home loans to help manage their financial risk.
- Banks and other financial institutions use SORA as a reference rate for pricing financial products such as loans and bonds in the country.
- SORA is a more transparent, liquid, and robust benchmark rate than other benchmarks like SOR and SIBOR.
- SORA rates are less susceptible to bank manipulation.
- The SORA benchmark is a more transparent derivative as it is published daily.
- As SORA interest rates may remain high this 2023, borrowers should be prudent and plan appropriately before getting a home loan.
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