You may have heard the terms SIBOR and SOR when you’re looking for a home loan. Most home loans in Singapore are based on one of these two reference rates. It can be confusing to choose between two of them for first time home-buyers.
What Are SIBOR and SOR?
SIBOR (Singapore Interbank Offered Rate) and SOR (Swap Offer Rate) are benchmark rates for commercial and private property prices in Singapore.
SIBOR and SOR based home loans are extremely popular among home buyers due to their transparency and security. Unlike some banks’ IBR (internal board rate) or variable rates, SIBOR and SOR are open to public scrutiny and are determined by the interactions between multiple banks (see next section). It is hence difficult for any individual bank to single-handedly raise the SIBOR or SOR rates.
SIBOR stands for the Singapore Interbank Borrowing Offer Rate . It is the interest rate at which banks and financial institutions in Singapore borrow from each other. Simply put, SIBOR reflects how much it would cost banks to borrow from each other.
SIBOR is administered by the ABS (Association of Banks in Singapore). Thomson Reuters will compiles the rates from 17 banks on a daily basis. The compiled rates are then ranked, with those on the upper and lower quartiles eliminated from the list. The remaining rates (which should come from at least eight banks) are averaged to make the day’s SIBOR. The majority of home loan packages in Singapore are based on SIBOR.
SOR rate stands for Swap Offer Rate and is likewise also a form of interbank lending rate. SOR is based on the foreign exchange rate with the US dollar. Basically, it projects what the interest rate would cost if the same amount of money were borrowed in US dollars. With forex as an extra variable in the calculation, swap offer rates (SOR) are typically more volatile than the Singapore interbank offered rates (SIBOR). Loans pegged to SOR tend to be subjected to higher uncertainty than SIBOR based loans, and can go lower or higher faster than SIBOR.
SIBOR or SOR?
SIBOR is determined by the demand and supply of funds between banks in Singapore and is tied to domestic or regional market conditions. Compare to SOR which is more responsive to the American (and hence global) market which subjected to exchange rates and the American money market fluctuation, SOR is usually more volatile than SIBOR.
Base on the above conditions, we can say that:
- SIBOR fluctuates less than SOR
- Borrowers with bigger risk appetite may prefer SOR loans as SOR tends to fluctuate more, the fluctuations of SOR can be below SIBOR sometime.
- Borrowers with less risk appetite may prefer SIBOR loans as SIBOR loans provides them more stability.
Below is a illustration for SIBOR and SOR rate trend from 2006 to 2014
Source - Moneysmart Propquest
More buyers are now finding cheaper alternatives in the executive condominium (EC) market as stricter loan requirements set for private property, media reports said.
The shift is due to the introduction of the Total Debt Servicing Ratio (TDSR) framework, which covers a borrower’s total debt repayment including mortgages. The Total Debt Servicing Ratio (TDSR) framework is to ensure borrowers are not overleveraged. TDSR calculates the percentage of your income that can go into servicing your loan. At present, the highest TDSR is 60%.
That means your housing loan repayments, after adding all your repayment obligations (Personal loans, car debts, credit loans, renovation loans, etc.), cannot exceed 60% of your income.
This buying trend became evident when recent EC launches reportedly saw bullish sales.
Sea Horizon EC in Pasir Ris was 3 times oversubscribed after receiving about 1,500 e-applications, the highest for an EC launched in 2013 to date. The Ecopolitan executive condominium (EC) was two times oversubscribed too.
Owners with existing HDB flats and who are applying for an EC unit have more chances to obtain the maximum loan quantum for a mortgage.
Buyers are required to sell their flats upon completion of an EC development under current HDB rules. This means banks will only consider the monthly payment on the EC and other debt obligations when evaluating the buyer’s loan eligibility.
But this is not the case for private property mortgages. Even if an upgrader is thinking of selling his HDB flat after buying a private property, the bank will still include the monthly mortgage instalment of the HDB flat together with the new commitment towards the private property when calculating the loan quantum he is eligible for at the point of application.
This reduces his or her chances of getting a bigger mortgage loan, and affects affordability especially if they have substantial debt obligations.
Source – MAS, Propertyguru, HDB
- EC demand will soar (paulngproperty.wordpress.com)
- Sea Horizon executive condo at Pasir Ris to launch at $800psf. (paulngproperty.wordpress.com)
- Record price for Executive Condominium (EC) site in Jurong (paulngproperty.wordpress.com)