IT manager Sue* will soon have to switch her existing loan based on the Singapore Dollar Swap Offer Rate (SOR) to a new loan package for a studio apartment she bought five years ago. She has not heard from her bank yet, but she is concerned that she may have to incur additional costs. She also wonders if the new loan package will involve a change to her lock-in period.
Married couple Tom* and Jane* face a different set of concerns. Their take-home pay has fallen due to the Covid-19 pandemic, and they are in danger of breaching the mortgage servicing ratio (MSR) and total debt servicing ratio (TDSR) requirements that limit how much households can borrow.
There are 7,000-plus retail borrowers who have floating-rate property loans referencing SOR, which will be discontinued after June 30, 2023. These loan packages need to be replaced with new ones, including those based on the Singapore Overnight Rate Average (SORA).
Besides the SOR-based retail loans, which have a total value of S$4.2 billion1, customers with property loans tied to the Singapore Interbank Offered Rate (SIBOR) will also need to switch out in due course as SIBOR will be discontinued after December 31, 2024.
What are SOR, SIBOR and SORA, and how are they different?
Global reforms to improve financial stability
The shift away from SOR and SIBOR comes as regulators and banks around the world move towards new interest rate benchmarks determined by transacted rates, which are more robust compared to existing benchmarks that are based on estimates.
With the globally used US dollar (USD) London Interbank Offered Rate (LIBOR) set for discontinuation after June 30, 2023, SOR – which uses USD LIBOR in its computation – will similarly be discontinued immediately after that date. As for SIBOR, the less-used six-month SIBOR will be discontinued after March 31, 2022, while the more widely used one-month and three-month SIBOR will be discontinued after December 31, 2024.
A transition plan for SIBOR-based loans is in the works and will be announced at a later date.
“The transition to SORA is overseen by an industry committee convened by the Monetary Authority of Singapore (MAS) comprising the relevant stakeholders. Since August 2019, the industry has put in significant effort to provide solutions to support a smooth transition away from SOR and SIBOR,” says Mrs Ong-Ang Ai Boon, director of The Association of Banks in Singapore (ABS).
ABS answers commonly asked questions
1. How will the move away from SOR affect my MSR and TDSR?
MAS will not require MSR and TDSR to be re-computed for affected borrowers making the switch within the same financial institution. This is a one-time exception as part of the industry-wide exercise to facilitate a smooth transition away from SOR to SORA.
If you initiate a refinancing of your property loan with another financial institution (which will be subject to the financial institution’s terms and conditions), you should check if you will be exempted from TDSR rules. For example, borrowers who are owner-occupiers are exempted from TDSR rules when refinancing their property loans.
2. Will switching to a SORA-based loan cause me to incur additional costs such as administrative fees, or face a change to the lock-in period?
Borrowers with existing SOR-based loans will not incur extra fees when they switch to the SORA Conversion Package. The package will be offered with no additional lock-in period. This means that borrowers can refinance their SORA-based loans with no penalties.
3. Apart from the SORA Conversion Package, what other options do I have?
Borrowers can switch their existing SOR-based loans to fixed-rate loans or loans pegged to other reference points such as fixed deposit rates or board rates. However, borrowers should note that switches to these other packages could be subject to administrative fees and/or changes to the lock-in period, as per the bank’s usual terms and conditions.
4. Can borrowers with SIBOR-based loans expect to see a conversion package similar to the one rolled out for borrowers with SOR-based loans?
As SIBOR will be discontinued later, banks will inform borrowers with SIBOR-based loans of their options at a later date.
Three-month SOR vs three-month Compounded SORA: A historical comparison
Historically, the three-month Compounded SORA tends to be lower than the three-month SOR with a difference of more than one percentage point on some days (see chart above). This is because SOR factors in a term and credit risk premium while SORA does not.
When converting a SOR-based loan to reference SORA, an adjustment spread is needed to account for the term and credit risks faced by the bank. What matters most to borrowers is that the all-in interest rate (i.e. SOR plus loan margin, or SORA plus the adjustment spread and loan margin) they pay each month to service their loans is comparable.
Note: The all-in rate for SORA-based loans may differ slightly from that of SOR-based loans after conversion, depending on movement of compounded SORA.
What’s next for homeowners with existing SOR-based loans
The MAS-established industry committee, the Steering Committee for SOR & SIBOR Transition to SORA (SC-STS), has recommended that banks make available a SORA Conversion Package for existing customers with SOR-based mortgages. This package is designed to minimise differences in interest payments at the point of conversion from SOR to SORA and will be offered at no extra fees or lock-in period.
In the above example, this should be good news for Sue as she will not incur any administrative fee or be subject to an additional lock-in period if she switches to the SORA Conversion Package.
If she prefers not to take this up, she may also opt for fixed-rate loans or loans pegged to other reference points such as fixed deposit rates or board rates that are currently being offered by banks.
As for Tom and Jane, MAS will not require the MSR and TDSR to be re-computed when they switch their loans out of SOR to other loan packages, including the SORA Conversion Package.
What changes to expect when switching to a SORA-based loan?
With the SORA Conversion Package, borrowers will have their SOR-based loan packages switched to one that references the three-month Compounded SORA. There will be an additional adjustment spread to account for the term and credit risks faced by the bank, but the loan margin remains unchanged.
The Adjustment Spread (Retail) will be published once a month by ABS Co and is applicable to all SORA-based loans in that month.
While these changes may sound complex, the actual impact on borrowers is likely to be minimal as banks in Singapore have been preparing over the past two years to ensure that the transition to a new interest rate benchmark is seamless for customers.
“Banks have adopted a clear and consistent industry-wide approach in facilitating the switch to SORA recommended by the SC-STS. With the adjustment spread calculation formula and data made publicly available, affected borrowers can be assured of high transparency and peace of mind,” adds Mrs Ong-Ang.
Click here to learn more about SORA and get the latest updates on Singapore’s interest rate benchmarks.
Timeline of events
Apr 30, 2021: Banks ceased usage of SOR in new loans and securities.
Sept 30, 2021: Banks to cease usage of SIBOR in new contracts and SOR in new derivatives (with exceptions).
Oct 31, 2022: Banks to convert all SOR-based property loans to alternative packages.
Dec 31, 2022: All other SOR contracts to be converted to SORA, or to include robust contractual fallbacks.
June 30, 2023: Discontinuation of SOR.
Dec 31, 2024: Discontinuation of SIBOR.
Glossary of terms
Term risk: The additional payment to compensate for uncertainty over how interest rates may move over a future period of time.
Credit risk: The additional payment to compensate for default risk faced by the bank.
MSR: Mortgage servicing ratio. It is the portion of a borrower’s gross monthly income that goes towards repaying all property loans, including the loan being applied for. MSR is capped at 30 per cent of a borrower’s gross monthly income. This applies only to property loans for HDB flats or executive condominiums where the minimum occupation period has not expired.
TDSR: Total debt servicing ratio. It is the portion of a borrower’s gross monthly income that goes towards repaying all monthly debt obligations (beyond just property loans), including the loan being applied for. A borrower’s TDSR should be less than or equal to 60 per cent of his/her gross monthly income.
*Sue, Tom and Jane are personas drawn up based on common concerns of homeowners with SOR-based loans.
This is the second of a four-part series on the banking industry’s transition to SORA, the new interest rate benchmark in Singapore.
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