That depends on both your appetite for risk and your knowledge of the property market. If you’re a property investor who knows your budget well, you can safely go with a SOR package as long as you’re not locked-in for too long.
On the other hand, if you are buying a property as a long-term owner-occupier, selecting a fixed-rate loan that’s tied to the SIBOR rate would be a safer choice for you.
What Is the Singapore Interbank Offered Rate (SIBOR)?
The Singapore Interbank Offered Rate (SIBOR) is a type of interest rate that’s fixed by the Association of Banks in Singapore. SIBOR represents the unsecured funds/rates that banks and financial institutions in Singapore lend to each other.
What Is the Singapore Swap Offer Rate (SOR)?
SOR is based on the foreign exchange rate with the US dollar. In a simple sense, it projects what the interest rate would cost if the same amount of money were borrowed in US dollars.
SOR is derived using the following formula:
USD/SGD Forward Rate = USD/SGD Spot Rate +/- SWAP Pts
SOR is responsive to the current state of the US economy. At present, only two banks in Singapore offer SOR based home loans.
How do SIBOR and SOR Work?
In Singapore, most banks offer housing loan packages tied to either the SIBOR or SOR rate. Think of it as a “cost price” for the bank. That’s because they add a margin on top of the SIBOR/SOR rate called a “spread.” So when you get a home loan, the bank interest rate will be the SIBOR/SOR rate plus the spread.
What SIBOR/SOR Options Are Available?
There are several SIBOR/SOR choices available including 1, 3, 6, 9, and 12-month SIBOR/SOR options. When choosing an option, it’s important to note that shorter terms have lower interest rates, but can change more frequently. The interest rate on longer terms will be higher, but it will remain stable during the term.
Let’s say you’re looking at a 1-month SIBOR at 0.2% and a 12-month SIBOR at 1%. The 1-month SIBOR is much lower, but will fluctuate frequently. So if it spikes to 1.2%, 6 months later, the 12-month SIBOR would have been a better choice.
Having said all that, its important to note that not all banks will let you choose the various SIBOR / SOR options. Most banks choose one index (3mth SIBOR and 3mth SOR being the most common) and stick to that without negotiation.
Are SIBOR/SOR Rates Better Than Bank Board Rates?
When applying for a home loan with a bank, you’ll need to choose between fixed or floating rate packages. If you choose a floating rate, you’ll need to consider choosing between a SIBOR, SOR or Internal Board Rate (IBR) package, which fluctuates according to the bank’s own discretion.
While most bankers trying to sell you Internal Board Rates will tell you that the rates have not been changed by the bank for the past X years ( usually about 8 years or so), this does not mean that they won’t do so in bad times. Since there is no required transparency in how these internal rates are calculated, and no real way of monitoring the potential uptrend, they could leave you stranded with some very high rates should banks decide to up them at any point.
Also, most banks structure their Internal Board Rate to be low and attractive in the first 2 years of the loan period, and then sky rocket in the 3rd and 4th year onwards. This forces you to have to consider refinancing very soon, as when the rates go up in those years, they typically hit regions of around 2.75% and more. (Higher than a HDB concessionary loan!).