Posts Tagged ‘Housing Loans’

What You Need to Know About SIBOR- and SOR-Based Housing Loans

April 25th, 2013

The city-state of Singapore has a small, open economy that hinges on importation, so exchange-rate procedures are implemented to keep imported inflation in check. The Monetary Authority of Singapore or MAS applies a managed float regime, in which the Singapore dollar is established against a currency basket involving the country’s primary trading partners. The interest rates in Singapore are thus affected by world markets, as dictated by the interest rates in the countries in the currency basket. Since the U.S. dollar is a substantial part of the basket, the interest rates in Singapore are proportional to those in the U.S.

Singapore Inter-bank Offered Rate, or SIBOR

SIBOR refers to the interest rates which banks and other financial institutions apply in lending funds to each other. This daily rate is established by the Association of banks in Singapore, and announced each day through mainstream media. It’s quite similar to the London Interbank Offered Rate, or LIBOR).

The SIBOR is attached to many housing loan plans, and it’s available in one-month, 3-month, 6-month or 12-month tenures. The longer the tenure, the higher the interest rates tend to be.

Singapore Swap Offer Rate, or SOR

SOR, on the other hand, refers to the average costs that banks and financial institutions in Singapore allocate for commercial lending. This is also determined by the Association of Banks in Singapore. SOR also refers to the currency swap between the U.S. dollar and the Singapore dollar, so it tends to be more unpredictable in comparison to SIBOR. In addition, fluctuations in the currency affect the trade volume.

SOR is also available in one-month, 3-month, 6-month and 12-month tenures. As the SOR tenure matures, rates are converted from the U.S. dollar to the Singapore dollar; this involves no bid or spread, so banks save money.

SIBOR- and SOR- Based Housing Loans

The floating-rate loan, also called a variable rate loan, is a common type of housing loan that utilizes the SIBOR or SOR in determining its interest rate. Most banks and lending companies offer housing loan plans that come with one-month or 3-month SOR or SIBOR.

The total interest rate for the loan takes the SIBOR or SOR into account, as well as the Spread. Simply put,

INTEREST RATE = SIBOR [or SOR] + Spread

Understanding Spread

The Spread is a margin that banks or financial institutions add to SIBOR or SOR. This usually appears as an amount added to the interest rate. For example, if the interest rate is indicated as below:

SIBOR + 0.75%

The Spread in this interest rate is +0.75%.

The Spread typically increases through the loan tenure, after the first few years of the loan. For instance, you may have a loan with interest rates that appear as below:

INTEREST RATES PER ANNUM

Year 1: 1-Month SIBOR + 0.75%
Year 2: 1-Month SIBOR + 0.75%
Year 3: 1-Month SIBOR + 0.75%
Year 4: 1-Month SIBOR + 1.00%
Year 5 and onwards: 1-Month SIBOR + 1.25%

Factors to Consider With SIBOR and SOR

- A SIBOR with a shorter tenure will tend to have lower rates than one with a longer tenure

- In general, SIBOR is more stable and fluctuates less than SOR. With this in mind, you may want to opt for SIBOR-based loans if you aren’t much of a risk-taker.

- Many people believe that SOR-based loan packages will have lower rates than a SIBOR-based plan during a low interest-rate climate. While this can sometimes be the case, it is not always true.

- SIBOR and SOR are indeed somewhat interrelated. Of these two, SOR is more unstable, and it may fluctuate above or below the current SIBOR. Refer to the diagrams below, which show illustrations for 1-month and 3-month tenures.

Figure 1: 1-Month SIBOR/SOR for Jan 2012-Apr 2013

1-Optimized

Source: www.iCompareLoan.com

Figure 2: 3-Month SIBOR/SOR for Jan 2012-Apr 2013

2-Optimized

Source: www.iCompareLoan.com

 Figure 3: 3-Month SIBOR/SOR for Dec 2006-Apr 2013

3-Optimized

Source: www.iCompareLoan.com

If you hope to take a loan, it would benefit you to pay more attention to the Spread, rather than the SIBOR or SOR. In addition, choose a loan plan with a sensible spread throughout its tenure.

Choosing a SIBOR or SOR Tenure

Banks and lending companies have recently offered loan plans with a one-month SIBOR. This typically means more administrative costs.

Figure 4: 1-Month and 3-Month SIBOR for Jan 1989-Dec 2012

 4-Optimized

Source: www.iCompareLoan.com

As you can see above, a 1-month SIBOR tends to be lower than a 3-month SIBOR through a period of 20 years. Given this inclination, you may want to consider a loan with a 1-month SIBOR with a reasonable Spread.

While a shorter tenure typically means lower interest rates, remember that this comes with more instability since the rates change more frequently. For instance, the rates in a one-month SIBOR changes every 1 to 3 months; a 12-month SIBOR on the other hand, remains constant and changes only after 12 months.

With all these factors and considerations for choosing a suitable loan plan, it can be quite confusing. It would certainly benefit you to ask the expert advice of a mortgage consultant, so he or she can help you with specific issues concerning your financial situation. If you need any assistance, go here to connect with a professional.

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