If you've been looking for a home loan in Singapore, you've probably seen your fair share of terms like 'SOR' or 'SOR-pegged home loans' and you may be wondering what SOR really means and how it affects the amount you will end up paying for your mortgage.
|Latest available sor rates|
|1 month SOR||1.5923%|
|3 months SOR||1.7508%|
|6 months SOR||1.9170%|
Here, we update the SOR rates weekly and also display a monthly SOR chart so that you are able to see how the SOR is trending.
What Is SOR?
In its simplest form, SOR is the exchange rate expected at a future time between the Singapore dollar (SGD) and the US dollar (USD), but in practice, it is the cost of synthetically borrowing SGD, by borrowing USD for a given tenure, and swapping the USD for SGD at the end of the maturity.
A Singapore Reference Benchmark Interest Rate
SOR, which is the property of the ABS Benchmarks Administration Co Pte Ltd, a wholly-owned subsidiary of the Association of Banks in Singapore (ABS), is widely used a reference rate for floating-rate home loans in Singapore.
A swap is a financial arrangement consisting of 2 legs, in which, set amounts of two assets are exchanged for one another (the near leg) and then re-exchanged on a predetermined date in the future (the far leg). When the assets are currencies, the swap is known as a foreign exchange (F/X) swap.
F/X swaps involve currency pairs (written A/B), in which the numerator is called the base currency and the denominator is the term currency, indicating the exchange rate between the two currencies as a result of buying currency A and selling currency B.
Basically, the SOR is the interest rate at which a USD/SGD swap is executed for a fixed tenure of overnight or 1, 3, or 6 months.
USD/SGD Swap Purpose
In terms of the SOR, the purpose of the USD/SGD swap is to synthetically, or virtually, borrow SGD by borrowing USD and swapping it for SGD.
This might be necessary, for instance, when the borrower needs to hold SGD for a certain time period but can only arrange borrowing in USD.
USD/SGD Swap Legs
The two legs of an USD/SGD swap are:
- The near leg, in which Party A borrows USD and immediately swaps it to Party B in return for a set amount of SGD.
- The far leg, in which Party A returns the SGD plus the interest amount to Party B, who in turn gives back the USD to Party A.
Role Of The SOR
The SOR, plus a small spread, is the interest rate charged to the borrower (Party A) by taking into account the current (spot) and future (forward) USD/SGD exchange rates and the spot USD interest rate for the specified tenor.
Components Of The SOR Calculation
The ABS calculates the SOR daily using these factors:
Spot Rate: the current USD/SGD exchange rate as of the initial day of the swap (swap date).
Forward Points: the difference between the spot rate for the near leg and the forward USD/SGD exchange rate for the maturity date.
USD Rate: the spot 1-day interest rate on USD.
SGD SOR Formula
Determining Maturity Dates
SOR maturity dates use the ISDA Modified Following Business Day Convention, which according to the ABS, it means that "if the maturity date of a deposit falls on a day that is not a Business Day, the maturity date shall be the first following day that is a Business Day, unless that day falls in the next calendar month, in which case the maturity date will be the first preceding day that is a Business Day."
Who Calculates The Rate?
ABS use a Calculation Agent, Thomson Reuters, to calculate the SOR each business day. The 1M, 3M and 6M SGD SOR is published on each Singapore or London Business Day, from Mon-Fri.
The Overnight SGD SOR is published on each Singapore, London and New York Business Day, from Mon-Fri.
The rates are published on Thomson Reuters and Bloomberg terminals, and on the ABS website seven days after.
The SGD SOR, Spot Rate and Forward Points are according to the following schedule:
Spot Rate: 4:45pm, Singapore time
Forward Points: 4.45pm, Singapore time
SGD SOR: 12:00 noon, London Time (7:00pm or 8:00pm, Singapore time)
SOR-Pegged Home Loans
In Singapore fixed rate and floating rate home loans can be packaged based upon the appropriate SOR rate plus an extra (or premium) amount, called a spread.
The spread is determined by a number of factors, such as the size of the home laon, the credit standing of the borrower, the location of the property, and more.
Fixed Rate vs Floating Rate Home Loan Pegged To SOR
A fixed rate home loan has a specific interest rate that is fixed and guaranteed for the initial period (typically 2 or 3 years) of the entire loan tenure, and the subsequent years' interest rates can vary.
On the other hand, a floating rate home loan could be pegged to the prevailing SOR rates, usually based on the 3-month or 1-month SOR rates.
In determining the interest rate for the loan, the bank applies the relevant SOR rate on a specific date (Rate Review Date) plus a specific percentage above the SOR rate.
For example, if the 3-month SOR is used, the 3-month SOR rate on the Rate Review Date plus the additional percentage will be used as the interest rate for the following 3 months, and this interest rate will be revisited on the next Rate Review Date.
Example Of A Home Loan Package Pegged To SOR
A bank might create a floating home loan package based on a SOR 3-month rate of say, 1.3 percent, plus a premium of 0.8 percent, resulting in a total interest rate of 2.1 percent, which remains until the next reset period, when a new rate is calculated.
1M SOR vs 3M SOR
The "M" stands for month, so a 1M SOR mortgage package resets its rate every month, while the 3M package resets every 3 months, depending on the prevailing SOR rate in play on the reset date/Rate Review Date.
Theoretically, although SOR mortgage packages might be available with reset periods (or tenures) of overnight, 1, 3 or 6 months, in practice the 1M and 3M SOR packages are by far the most popular, especially when interest rates are fairly low.
Advantage Of Shorter-Tenure SOR-Pegged Mortgage Packages
These packages are popular during periods of falling interest rates, because they give borrowers more opportunities to benefit from decreasing rates.
Advantage Of Longer-Tenure SOR-pegged Mortgage Packages
Naturally, these packages are more popular during periods of rising rates, as borrowers save money up until the next reset date, but the packages are also favoured by borrowers who want more certainty of unchanged rates for a longer period of time.
Because SOR is based on both interest and currency exchange rates, it is more volatile than SIBOR.
Here you can learn more about SIBOR rates.
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To learn more about the pros and cons of SIBOR and SOR home loans, you can check out this guide to Singapore Home Loans: SIBOR vs SOR.
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