SIBOR and SOR are index rates where Singapore banks lend to one another. It is basically the interest a bank has to pay for a loan from another bank. This index is used commonly as a base for home loans in Singapore.
It will therefore be common to see home loans with a rate like SIBOR + 0.75%. In this case, the mortgage is directly pegged to SIBOR. However, since the cost of borrowing is related to SIBOR. Unless you are referring to HDB loans from the government, it is fair to say that every home loan is directly or indirectly dependent on SIBOR fluctuations.
Fixed rate loans will eventually convert to a floating rate that will be affected by SIBOR. Variable rates will depend on the issuing bank’s board rate cost of funds (which is affected by SIBOR). Even indexes not related to SIBOR will be affected by it simply due to it’s relation to costs of funds for every lender.
History and Trend
SIBOR and SOR has a long history with it’s peak at around 7.75% (3 month SIBOR) during the midst of the Asian financial crisis in January 1998. It then nose-dived during the year to end the year (1998) at 1.88% (3 month). It was hovering around 1%-2% for a few years until it fell through the support level of 1% in 2002. It finally started to make a comeback in mid-2004, slowly inching to 3.44% in December 2006. Even though the subprime mortgage crisis have yet to officially happen in 2007, market forces have already started to put downward pressure on the index throughout 2007 and 2008. View SIBOR and SOR movement during the crisis here.
The mortgage crisis happened in 2008. And with the Federal Reserve pegging interest rates to as good as zero, SIBOR below 1% became a market norm. It went below 0.50% (3 month) in October 2010 and have stayed within that trading band until it came life in February 2015 due to an expectancy of interest rate hikes from the Federal Reserves.
During this period from October 2010 to February 2015, SOR fell to a negative value in August 2011. Describing it as a crash is an understatement. You only have to look at the charts to realise how sudden it was.
3 month SIBOR finally broke through the resistance level of 1% in April 2015.
It is generally agreed that SIBOR is more stable while SOR is more volatile. But do note that stability does not mean low and volatile does not mean high. In fact, SOR has been the lower of the 2 for quite a few years after 2008. This is partly due to the currency exchange rate between USD and SGD. It has been observed that when SGD spikes against the USD, the 2 indexes fall. And when USD appreciates against SGD, the indexes rise. Another way to look at it is that when SOR rises, USD could be primed for an upward trend.
SIBOR and SOR home loans – Which is better?
Reference rates like the SIBOR, SOR, FHR(fixed deposit rate), etc, are just indexes that your housing loan is pegged to. Most people have a preference for SIBOR as it is more stable compared to SOR. But do note that even though the latter is considered more volatile, it had enjoyed an extended period trading below SIBOR ever since the mortgage crisis in 2008. Since then, it is only in 2015 that wild swings pushed it above SIBOR. At the same time, SIBOR was as volatile as SOR.
There is not one index better than the other when comparing the 2 as they have both become unpredictable. The best factor when determining which loan to choose will then be the spread and the terms that comes with the loan.
Main advantage and disadvantage
As the indexes follow the movement of the market, you can be assured that you are not paying above that market rate when you are on a SIBOR related loan. This implies that if economic conditions worsen, you will not be locked into a high rate on your housing loan.
On the other hand, if you are on a fixed rate loan, you could very well be paying more than the market when general interest rates go down. This is because your loan is fixed and does not move with the market. You cannot expect lenders to adjust your rates downwards just to please you.
What can you do to mitigate risk of interest rate hikes if you currently have a SIBOR loan?
Most of the home loans in Singapore will be directly or indirectly affected by SIBOR one way or another. Even when there is no SIBOR element in your mortgage, the costs of funds will be a factor. These are some things you can do.
Start switching the term.
SIBOR comes in various terms. Namely 1 month, 3 month, 6 month, 12 month. SOR comes in 1 month 3 month 6 month. For each option you choose, you loan is “fixed” to that particular rate for that specific period. For example, if you are to take a 12 month term, your rate will be “locked in” for 12 months before your rate is refreshed to the new 12 month SIBOR rate. There are banks that allow you to do this for free.
The longer the term, the more protected you are from sudden interest increases. And the shorter the term, more you will benefit from sudden interest rate decreases.
Convert your loan
If you are still in the early years of your loan, go check your facility letter. You might still be within a period where the lender allow you to convert your loan to a different one. This means you might be able to change your loan from a floating rate to a fixed rate.
Request for re-pricing
A re-pricing is different from a conversion. A conversion is something written into the terms of acceptance when you originally signed up for your mortgage. This means that it is a clause that you can enforce.
Whereas a re-pricing is a request to your bank to adjust your interest rate. You won’t be able to force a lender to give in to your request. It is up to them whether or not to entertain it. You have, after all agreed to the terms when you sign up your existing loan. You can’t change the rules whenever the market is unkind to you.
You will not necessarily be better off switching from loan to loan all the time. But if you want to get away from SIBOR, you can manage your exposure by taking short term positions on your loan. You do that by refinancing.
This means that instead holding onto a loan throughout it’s long term tenor, you take on multiple short term positions on loans that are not directly pegged to SIBOR. In the market, you will find alternatives like, variable rates, board rates, fixed deposit rates, etc.
In theory, you can move from one mortgage to another until you get sick of it.
For example, you can refinance your current housing loan to fixed rates for 3 years. Then repeat the process 3 years later, and so on. Just take note that there will be legal fees involved every time you refinance. Some banks do offer legal subsidies to cover your legal fees. You can contact us for the latest available refinancing rates.
Last but not least, you can totally eliminate your fear of interest rate hikes by redeeming your loan partially or fully. If you have excess cash sitting in a fixed deposit account giving your 1% interest, and your SIBOR pegged home loan is costing you 2%, you will be better off putting that money into a lump sum repayment on your home loan. You can withdraw that cash via a home equity loan in future, provided your income supports it.
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