What Homeowners Need to Know About Singapore’s Switch to New SORA Interest Rate Benchmark, Banking News & Top Stories

IT manager Sue * will soon have to replace her existing loan based on the Singapore Dollar Exchange Offer Rate (SOR) with a new loan package for a studio she bought five years ago. She has not heard from her bank yet, but is worried about having to incur additional charges. She also wonders if the new loan package will involve a change in her downtime.

Married couple Tom * and Jane * face a different set of concerns. Their take-home pay has plummeted due to the Covid-19 pandemic, and they risk violating Mortgage Service Ratio (MSR) and Total Debt Service Ratio (TDSR) requirements that limit the amount that households can to borrow.

There are over 7,000 retail borrowers who have variable rate home loans referencing SOR, which will be discontinued after June 30, 2023. These loan packages need to be replaced with new ones, including rate based ones. Singapore Way (SORA).

Besides SOR-based retail loans, which have a total value of S $ 4.2 billion1, clients with mortgage linked to the Singapore Interbank Offered Rate (SIBOR) will also need to withdraw 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 move away from SOR and SIBOR comes as regulators and banks around the world move towards new benchmark interest rates determined by negotiated rates, which are more robust against existing benchmarks based on estimates.

With the London Interbank Offered Rate (LIBOR) used globally in US dollars (USD) to be phased out after June 30, 2023, the SOR – which uses USD LIBOR in its calculation – will also be phased out immediately after that date. . As for SIBOR, the less used six-month SIBOR will be phased out after March 31, 2022, while the more widely used one-month and three-month SIBOR will be phased out after December 31, 2024.

A transition plan for SIBOR-based loans is underway 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 relevant stakeholders. Since August 2019, the industry has made considerable efforts to provide solutions that enable a smooth transition away from SOR and SIBOR, ”said Ms. Ong-Ang Ai Boon, Director of the Association of Banks of Singapore (ABS).

What’s Next For Homeowners With Existing SOR Based Loans

The sector committee established by MAS, the Steering Committee for the SOR & SIBOR to SORA Transition (SC-STS), recommended that banks make available a SORA conversion package for existing clients with SOR-based mortgages. This package is designed to minimize differences in interest payments when converting from SOR to SORA and will be offered without any additional fees or lock-in period.

In the example above, this should be good news for Sue, as she will not have to pay an administrative fee and will not be subject to an additional blocking period if she switches to the SORA conversion package.

If she prefers not to avail herself of it, she can also opt for fixed rate loans or loans indexed to other benchmarks such as fixed deposit rates or repo rates that are currently offered by banks. .

As for Tom and Jane, MAS will not require the MSR and TDSR to be recalculated when they switch their loans from the SOR to other loan packages, including the SORA conversion package.

While these changes may seem complex, the actual impact on borrowers is likely to be minimal, as Singapore banks have prepared over the past two years to ensure the transition to a new benchmark goes smoothly. clashes for customers.

“Banks have taken a clear and consistent industry-wide approach to facilitate the transition to SORA recommended by SC-STS. Thanks to the formula for calculating adjustment differences and to the data made public, the borrowers concerned can be assured of great transparency and peace of mind, ”adds Ms. Ong-Ang.

1 https://abs.org.sg/docs/library/sc-sts-recommendations-for-transition-of-legacy-sor-contracts.pdf

* Sue, Tom and Jane are characters created based on the common concerns of homeowners with ORS-based loans.

Source: ABS

This is the second in a four-part series on the banking sector’s transition to SORA, the new benchmark for interest rates in Singapore.

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