If you have been shopping for a home or a new office, you probably have encountered the word “SIBOR” or “SOR” quite often. But, most explanations mixed with words like “swap rate,” “forward rate” and “reference rate” may not quite make much sense to you. To help you understand exactly what SIBOR and SOR are, why they matter and how they have been trending, we have prepared the guide below.
What Is SIBOR?
SIBOR stands for Singapore Interbank Offered Rate. It is simply an interest rate that banks in Singapore charge to each other. Just as we borrow and lend money between friends and family, banks often do the same, albeit at bigger scale. Also, while we may not charge an interest rate to our family, banks are businesses and they earn an interest when lending to other banks, and it is decided by SIBOR.
SIBOR is administered by an organization called Association of Banks in Singapore (ABS), and you can check the market rate every month on ABS’s website. We’ve compiled a historical data of how SIBOR has trended since 1999 below. As you can see, there has been a recent sharp drop in rate starting from early 2020 due to covid-19 and has since remained low. After hovering below 1% from 2009 through 2014 and then increasing to a peak 3-month SIBOR rate of 2% back in mid-2019, the rate has since dropped back to historic lows of 0.43%.
What Is SOR?
SOR, which stands for Swap Offer Rate, is basically a clone of SIBOR except that it reflects the exchange rate between SGD and USD. This is because Singapore is a very international market, and there are many international banks operating in the country. As you can see in the below chart, SOR has more or less moved in line with SIBOR since 1999. Both rates following the during the Great Recession and then stayed very low from 2009 through 2014. In more recent years, both SIBOR and SOR increased slowly, with 3-month SOR reaching 1.58% in May 2018 before dropping due to COVID-19.
According to ABS, SIBOR and SOR for different maturity of loans have priced at interest rates displayed in our table below. We also show the “spread” between different maturities. Notably, the spread among different tenure SIBOR rates have widened in 2018, meaning longer term loans have become relatively more expensive quicker than shorter term loans.
|Chart Updated as of 26 November 2020||SIBOR||SOR|
Why Do SIBOR and SOR Matter?
So why should you care about SIBOR or SOR? How do these interest rates impact you if they are only applicable to bank that lend to each other? This is because banks often price your mortgage loans based on SIBOR rate (and sometimes on SOR). To see how this works, let’s consider an example.
In general, most mortgage loans in Singapore are priced at a “premium” to 3-Month SIBOR, though there are fixed rates available. For example, a mortgage loan can be priced at 3-Month SIBOR + 0.8%, meaning banks will make 0.8% profit margin on the loan after paying 3-Month SIBOR to a lender. If 3-Month SIBOR is 0.87%, the total interest could be 1.57%. SIBOR or SOR based home loan packages in Singapore are typically structured to allow borrowers to determine what their interest payments will be until the end of the loan tenure. Below is an example of a typical floating rate mortgage loan in Singapore.
Example Floating Rate SIBOR Package:
- Year 1: 3 Month Sibor + 0.75%
- Year 2: 3 Month Sibor + 0.85%
- Year 3: 3 Month Sibor + 0.95%
- Year 4 (onwards): 3 Month Sibor + 1.25%
A floating rate loan could be a cheaper source of funding than a fixed rate loan. However, it exposes the borrower to the risk of rising interest rates, which will inflate the debt's cost over time. A fixed rate can reduce this uncertainty, though it comes with a higher interest rate than a comparable floating rate loan in exchange.
SIBOR vs SOR: Which Should You Choose?
Most banks in Singapore offer mortgages based on SIBOR, although a limited few also offer SOR based loans. The main difference between the two is that SIBOR is more steady while SOR is more volatile. On the other hand, SOR is slightly lower than SIBOR in the recent months, so you may be able to get a cheaper loan through it. However, there have been prolonged periods of times (like in 2006 and 2007) when SIBOR was lower than SOR. In general, SOR declines more than SIBOR when rates are going down, but it can also overshoot SIBOR when rates are going up.
Currently, choosing between SIBOR and SOR is a tradeoff between low rate and volatility. You may choose to go with SIBOR and pay a steady interest rate on your mortgage. Or, you could go with a SOR rate to save on your interest in the short-term, though you take the risk of highly volatile interest rate that could increase more than SIBOR. Below, we show how 3-month long SIBOR and SOR have trended over time since 1999.