Understanding SIBOR and SOR Based Home Loans in Singapore  

Understanding SIBOR and SOR Based Home Loans in Singapore

 

As a small, open economy that depends largely on imports for most of its needs, Singapore adopts an exchange rate policy, which curbs import-based inflation. Specifically, Singapore makes use of a managed float regime, whereby the Monetary Authority of Singapore (MAS) manages the Singapore dollar against a Home Renovation Loan Singapore  basket of currency of its main trading partners, but allows it to fluctuate between an undisclosed band. Thus the interest rate in Singapore is determined by world money markets. It follows closely the interest rate of the countries in the basket of currency, of which the US dollar makes up a main component. Consequently, there is a correlation between the US interest rates and that of Singapore’s.

What is Singapore Inter-bank Offered Rate (SIBOR)?

SIBOR is the interest rate at which banks and financial institutions in Singapore borrow from each other. It is similar to the London Interbank Offered Rate (LIBOR). Set by the Association of Banks in Singapore, SIBOR is transparent and announced daily through the mainstream media.

Many home loan packages offered in Singapore are pegged to SIBOR.

SIBOR comes in different blends of 1-, 3-, 6-, 12-month. So the 1-, 3-, 6-, 12-month SIBOR are the interest rates for borrowing for 1, 3, 6 and 12 months, respectively. The longer the tenor, the higher the rate is.

What is Singapore Swap Offer Rate (SOR)?

In contrast, SOR is the lending costs and the expected forward exchange rate between the US dollar and Singapore dollar. Upon maturity of the SOR tenor, there is a Forex conversion from US dollar to Singapore dollar, but there is no bid and spread, therefore the banks save money amongst themselves.

As SOR can be interpreted as currency swaps between the US dollar and Singapore dollar, it has slightly more volatility compared to SIBOR and current movements impacts the trading volume of the SOR contracts.

SOR is also set by the Association of Banks in Singapore and comes in different blends of 1-, 3-, 6-, 12-month.

What are SIBOR and SOR pegged home loans?

Floating (variable) interest rate loans in Singapore make use of SIBOR or SOR as the variable component in the interest rate. Most loan packages follow the 1- or 3-month SIBOR or SOR. The interest rate for the loan will be defined as spread + SIBOR or spread + SOR.

What is spread?

 

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