Table of Contents
- What is the SIBOR Rate?
- What is the SIBOR Rate Now?
- How is the SIBOR Determined?
- What Affects SIBOR Rates?
- 1-Month SIBOR
- SIBOR vs SOR; What is the Difference and Why Does it Matter?
- SORA (Singapore Overnight Rate Average) May Be Replacing The SIBOR
What is the SIBOR Rate?
Singapore Interbank Offered Rate (SIBOR) is the reference interest rate for interbank lending in Singapore, where banks get loans from other banks within the Singapore market. This interbank market is typically used to transfer funds and currencies between banks in the Singapore market to manage liquidity. SIBOR is currently the most common base rate used to calculate home loan interest rates. However, this is soon to be changed after the adoption of the SORA.
What is the SIBOR Rate Now?
Current Singapore Interbank Offered Rate (as of 5 Jan 2021)
How is the SIBOR Determined?
SIBOR is set every day by the Association of Banks in Singapore (ABS). There are 20 member banks who can report their interest rates daily. The calculation is made based on these interest rates if at least 12 member banks report their rates for the day. If more than 12 member banks report for the day, the upper and lower quartiles are removed to get an average SIBOR. If less than 12 member banks report for the day, no SIBOR rate will be calculated.
What Affects SIBOR Rates?
SIBOR rates can be affected by the following factors:
- Connected economies and exchange rates
- Supply and demand of transferring funds between banks, borrowers and equity funds in Singapore
- Overnight funds market
- United States Federal Fund’s rates
The 1-month SIBOR and 3-month SIBOR are the most common The 1-month SIBOR and 3-month SIBOR are the most common rates used for home loans. The 1-month SIBOR changes more frequently and is therefore more sensitive to changes in the economy.
While the 1-month SIBOR tends to be lower than the 3-month SIBOR, the 1-month SIBOR is more viable when interest rates are projected to be declining for the period of the home loan package. However, in the current low-interest rate environment, borrowers can safely select the option with the lowest interest rate, while retaining the three-year lock-in period.
SIBOR vs SOR; What is the Difference and Why Does it Matter?
The Singapore Swap Offer Rate (SOR) uses the Singapore Dollar (SGD) and United States Dollar (USD) USD forward rates and spot rates to calculate the implied interest rate. The SOR indicates the cost of artificially borrowing SGD, which is done by borrowing USD then using a currency swap (FX swap) to get SGD.
While SOR may be used as an alternative to the SIBOR, they are each influenced by different factors, although their wider trends tend to follow similar patterns. Therefore, regardless of the state of the economy, an increase in SIBOR also means there would be an increase in the SOR.
While both are administered by the Association of Banks in Singapore, The SIBOR is typically used for home loans, while the SOR is usually used for commercial loans and wholesale loans. The two rates are also calculated differently. The SIBOR is based on the interest rate charged between banks when borrowing unsecured funds in Singapore, derived from the average of at most 10 banks.
SOR, on the other hand, merely uses the average rate from SGD and USD spot transactions. As a result, the SOR tends to fluctuate more as it is tied to the US economy, hence why it is no longer applied to home loans.
Approximately one-quarter of all borrowers of home loans are under the SIBOR or SOR rates, rather than fixed interest rates.
SORA (Singapore Overnight Rate Average) May Be Replacing The SIBOR
The SIBOR will be phased out and replaced with the Singapore Overnight Rate Average (SORA) in the next 3 to 4 years. The SORA is an alternative to the SIBOR in providing interest rate benchmarks, used by banks to decide how much interest they should charge on a loan. The SORA is used for home loans and unlike the SIBOR and SOR, is administered by the Monetary Authority of Singapore (MAS).
The SORA is calculated using data from the overnight interbank cash market (SGD) in Singapore, through the volume-rated average rate of unsecured lending transactions. However, the SORA is more transparent than the SIBOR, since it takes into account the average rate over all interbank lending transactions, rather than excluding the upper and lower quartiles of data.
Following the switch to using the SORA, both the SIBOR and SOR would be discontinued. This action follows the joint “SIBOR Reform and the Future Landscape for SGD Interest Rate Benchmarks” report from the ABS, Singapore Foreign Exchange Market Committee, and the Steering Committee for SOR Transition to SORA.
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