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What SIBOR Rates Mean for Your Home Loans And Why You Should Track It (2020)

In this article, we will explain what is SIBOR, why it’s so important (it’s far deeper than just mortgages), and factors to consider when choosing SIBOR-pegged home loans. We’ll also discuss SIBOR’s unpopular cousin—SOR.

If you are even thinking about owning a property in Singapore, you need to pay attention to SIBOR. Scan through any home loan offerings here in Singapore and you’ll likely come across packages where the interest rate is listed as “1M-SIBOR + x.xx%”. These are SIBOR-pegged floating-rate home loans.

Right away, you can see that an increase in the SIBOR component would also increase your monthly mortgage payment. Consider that in the context of an average home loan tenure of 30 years—it can add up to tens or even hundreds of thousands of dollars.

In this article, we will explain what is SIBOR, why it’s so important (it’s far deeper than just mortgages), and factors to consider when choosing SIBOR-pegged home loans. We’ll also discuss SIBOR’s unpopular cousin—SOR.

What is SIBOR anyway?
SIBOR stands for the Singapore Interbank Offered Rate, and it is the rate that Singaporean banks can borrow money from each other via the interbank market. There are four SIBOR tenures: one, three, six, and twelve months.

The global banking system follows a fractional reserve model, meaning banks don’t actually have 100% of the deposits you and I put in them on hand. Most of it is already lent out as loans. So, when banks face liquidity (immediate cash) shortages—for instance, the amount of loans they must disburse that day exceeds their cash—they borrow from other banks. SIBOR is the rate at which Singaporean banks can do so.

Each business day, each of the 20 banks that form the panel of the Association of Banks in Singapore (ABS) submit a rate at which they think they could borrow funds on the interbank market. After removing the top and bottom quartiles, SIBOR is then set as the average of the remaining submissions. You can track the daily rate on the ABS site here.

What is SOR?
SOR stands for the Swap Offer Rate, and explaining it is a little more complex. But to keep it simple, it is the cost of borrowing SGD if you had done so by first borrowing USD and then swapping it to SGD using a foreign exchange derivative. It is also calculated by the ABS.

Unlike SIBOR, however, for the purposes of assessing home loans, you can pretty much ignore it (we’ll explain why in the next section).

Why SIBOR and SOR matter
Both SIBOR and SOR are reference rates, and they are used to determine the final interest cost on floating rate loans. This is because they both serve as a gauge for a bank’s cost of funds, so for banks to be profitable, they must charge a spread on top of that.

SIBOR is a widely used reference rate for home loans, but also for derivatives, corporate loans, as well as government and corporate bonds. Essentially, a move in SIBOR doesn’t just affect the interest cost of home loans, but hundreds of billions more in other financial instruments as well.

As for SOR, while it was once also a popular reference rate, it is being completely phased out. Because of the USD component in its calculation, it is far more volatile compared to SIBOR—not an ideal trait for a reference rate.

As such, the last SOR-pegged home loan was taken off the market in July 2017. In August 2019, the ABS announced that it would gradually shift away from using SOR as a reference rate in all markets. And in March 2020, it was announced that the financial industry broadly supports the move from SOR to SORA—the Singapore Overnight Rate Average—as a new reference rate.

So, in a nutshell, when it comes to SIBOR vs. SOR, SIBOR matters while SOR no longer does. In the future, we may see SORA-pegged home loans, but we can only speculate at this point.

Now that you understand what SIBOR is and why you should track it, the next question is, are there any advantages of SIBOR-pegged home loans over the other types?
Should you choose a SIBOR-pegged home loan?
There are two components to this question. Firstly, should you choose fixed-rate or floating-rate home loans, and secondly, should you choose a SIBOR-pegged loan over other floating rate loans?

Fixed vs floating-rate home loans
In a fixed-rate loan, you lock in your interest rate for the duration of the loan—decades. This means if interest rates rise, you will benefit as you will still pay the lower rate. But if interest rates fall, you will lose out since you could have paid the lower rate. In a floating rate loan, it is the other way round.

Ultimately, there is no right or wrong answer to this question. In the corporate loans market, billion-dollar multinational corporations must routinely choose between fixed or floating rates. Sometimes their decision saves them money. Other times it is the opposite.

However, one thing to note is that interest rates globally are on the decline. This is because a common central bank response to help combat economic recessions—such as the 2008 global financial crisis and the one from COVID-19—is to slash interest rates. And SIBOR has indeed been on the decline since the COVID-19 crisis started.
Keep in mind also that there is still a fixed rate component even in a SIBOR-pegged loan, albeit a much shorter one. For example, if you choose a home loan pegged to the 12-month SIBOR, you are essentially on a one-year fixed rate loan. That said, most SIBOR-pegged home loans use the 3-month SIBOR as a reference rate (based on the first business day of the month).

SIBOR-pegged loans vs. other floating-rate home loans
Fixed rate loans aside, if you have decided upon a floating rate mortgage, then SIBOR is the most transparent option. No one bank can influence the rate. Second, because the spread each bank charges over SIBOR is clear to see, it is easy to compare home loans against one another.

The alternatives are board (interest rate fixed internally by a bank) and FD rates. The former has zero transparency as they are solely at the bank’s discretion, while FD rates vary by bank, making comparison more difficult.

However, it is important to understand that despite SIBOR’s transparency, banks still have a lot of discretion. For instance, in April 2020, CIMB Singapore announced a ‘minimum rate’ to its 1-month and 3-month SIBOR. This means if SIBOR fell below that minimum rate, your final interest rate would be based on that minimum rate plus the bank’s spread (instead of SIBOR plus the spread). For obvious reasons, this was controversial, which is why the bank decided to delay the move until 2021.

PropertyGuru – your guide to the housing market
Financing is a major part of purchasing property, whether for investment or own-stay purposes.
At PropertyGuru Finance, we partner with all the major banks in Singapore to give you access to the best rates possible—whether SIBOR-pegged or otherwise—and limited-time bank promotions.
You can also speak to one of our Home Finance Advisors for in-depth and independent advice to help you navigate the market or read more informative articles on home financing.

This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people’s financial literacy levels – a necessity in our modern world.

Source: https://www.propertyguru.com.sg/property-guides/what-sibor-rates-mean-for-your-home-loans-and-why-you-should-track-it-2020-28220

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