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SOR transition to SORA – FAQs for Retail Clients with SOR-based property loans

On 19 March 2020, the Steering Committee for SOR & SIBOR Transition to SORA (“SC-STS”)¹ outlined its key priorities and updated transition roadmap to achieve a smooth transition to the Singapore Overnight Rate Average (“SORA”) as the new interest rate benchmark for the SGD cash and derivatives markets. The transition will affect retail clients who hold products which reference the Singapore Dollar Swap Offer Rate (“SOR”), as SOR will be discontinued after 30 June 2023.

If you have a SOR-based property loan, the Bank will be sending you a letter in October 2021 to inform you that you must switch to another reference rate before SOR is discontinued. You may contact us at SG.MRU@sc.com to find out more about switching to a SORA Conversion Package, or any prevailing packages offered by the Bank. Please contact us as early as possible, preferably before 31 December 2021.

You may refer to the FAQs below or the ABS website here for more information.

1. What is SORA (Singapore Overnight Rate Average)?

SORA reflects the average rate at which banks in Singapore borrow funds overnight from one another. SORA has been calculated and published daily by the Monetary Authority of Singapore (MAS) since 2005. It is a robust and transparent interest rate benchmark that is replacing SOR (Singapore Dollar Swap Offer Rate) and SIBOR (Singapore Interbank Offered Rate) for use in Singapore dollar interest rate products such as loans.

MAS also publishes a series of Compounded SORA2 rates in 1-month, 3-month and 6-month tenors3, which are easily referenced in new SORA loan products offered by banks.

 

2. What is a SORA Conversion Package?

Banks are offering customers with existing SOR loans a switch to a SORA-based loan at no additional fee and lock-in period. The SC-STS has termed this the SORA Conversion Package, and this is designed to minimise differences in interest payments at the point of conversion from SOR to SORA. This is achieved through the application of a standardised adjustment spread – Adjustment Spread (Retail).

  Before

(SOR loan)

After

(SORA Conversion Package)

Reference Rate 1-month SOR,

3-month SOR; or

6-month SOR

3-month Compounded SORA
Customer Margin Your existing SOR loan margin Your existing SOR loan margin

+ relevant Adjustment Spread (Retail)

 

See questions 3 and 4 for details on Adjustment Spread (Retail).

The SORA Conversion Package will be tied to the 3-month Compounded SORA. The 3-month Compounded SORA is the most commonly offered tenor setting for SORA loan packages. It is computed by taking the compounded average of daily SORA over the preceding three months. The averaging effect of compounded SORA reduces rate volatility, providing for more stable rates.

3. What is the Adjustment Spread (Retail) for and how does this affect my loan?

An adjustment spread is necessary when converting a SOR loan to a SORA reference rate because there are fundamental differences between SOR and SORA. In particular, as seen in Chart 1, SORA is typically lower than SOR.

Chart 1: Historical comparison of 3-month SOR and 3-month Compounded SORA

An Adjustment Spread (Retail) accounts for this difference by reflecting the average difference between the two benchmarks over the preceding three months, subject to a floor of zero⁴. Chart 2 shows an illustrative example of how Adjustment Spread (Retail) is computed.

 

Chart 2: Illustrative example on how Adjustment Spread (Retail) is computed 

 

To ensure consistent application across the industry, the Adjustment Spread (Retail) rates are published on The Association of Banks in Singapore’s website at https://abs.org.sg/benchmark-rates/publications on the first business day of each month.

Three Adjustment Spreads (Retail) rates will be published each month, namely

  • 1-month SOR to 3-month Compounded SORA,
  • 3-month SOR to 3-month Compounded SORA, and
  • 6-month SOR to 3-month Compounded SORA.

These Adjustment Spread (Retail) rates will apply to all SOR loans that are converted to the SORA Conversion Package in that month5.

 

4. Will the Adjustment Spread (Retail) change throughout the tenor of my loan?

No, the Adjustment Spread (Retail) that is applied to your loan will stay the same for the remaining tenure of your loan. There will not be any changes subsequently.

 

5. Can my property loan continue to reference SOR?

No, you will need to switch out of your SOR-based loan as SOR will no longer be available after 30 June 2023. This is to avoid any disruption (e.g. interest on the loan cannot be computed) to your loan when SOR ceases.

Although SOR will only be discontinued after 30 June 2023, it is best if you contact us early to explore your options.

 

6. Will I be subject to re-computation of the TDSR when I switch from my SOR loan to an alternate package?

As the need to replace the SOR-based property loan with an alternative loan package is driven by the discontinuation of SOR, the MAS will not require financial institutions to re-compute the TDSR for affected customers making the switch within the same financial institution. This is a one-time exception as part of the industry-wide exercise to facilitate customers’ switch to replacement loan packages offered by their financial institutions.

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 can avail yourself to other TDSR exemptions. Borrowers who are owner-occupiers are exempted from TDSR when refinancing their property loans.

 

7. How do SORA-based loan packages compare with existing SOR- and SIBOR-based loan packages?

Financial products referencing SORA typically use an average of daily SORA readings over a period. The averaging effect helps to smooths out day-to-day fluctuations, producing a rate that is less volatile for borrowers. This is in contrast to financial products using SOR or SIBOR, which generally use only a single day’s reading for each interest payment period, and hence may be more prone to abrupt changes in rates on the interest reset date.

For retail customers, banks will be offering loan packages that are based on SORA compounded in advance. This means that the interest payment for each interest period would take reference from daily SORA rates over a recent prior period. Compounding in advance gives borrowers advance notice of the interest amounts due in each period to help them better plan their finances. How the SORA compounded rate is being applied to the loan will be similar to how SOR and SIBOR reference rates are being used, depending on each bank’s internal process.

The use of compounded in advance SORA in retail loans means that any change in current market conditions will not be immediately reflected in the customers’ loan rates but will be reflected in subsequent months when loan rates are reset.

 

8.How do I switch to a SORA Conversion Package or another loan package?

You can contact at SG.MRU@sc.com or call our 24-hour Client Contact Centre at +65 6747 7000 . We urge you to contact us by 31 December 2021.

 

9. Can I choose to switch my SOR-based property loan to a SIBOR-based loan package?

SIBOR is set to be discontinued by the end of 2024. To prepare for the discontinuation of SIBOR, the SC-STS announced that all financial institutions should cease to offer new SIBOR-based loans by 30 September 2021.

As banks in Singapore no longer offer SIBOR-pegged loans, you will not be able to switch your SOR loan to a SIBOR loan. This also helps you to avoid making another switch when SIBOR is discontinued.

 

10. I have an existing SIBOR-based property loan. How will I be affected?

If you have a loan that references 6-month SIBOR, we would have contacted you earlier, as the 6-month SIBOR will be discontinued shortly by 31 March 2022.

If you have a loan that references 1-month or 3-month SIBOR, which will cease immediately after 31 December 2024, we will contact you in due course to guide you in replacing your SIBOR loan with other loan packages.

 

1 The SC-STS refers to the Steering Committee for SOR & SIBOR Transition to SORA. It was established by the MAS in August 2019 to oversee the industry-wide interest rate benchmark transition from SOR to SORA. The MAS subsequently expanded the committee’s mandate in December 2020 to include the SIBOR to SORA transition as well.

2 https://eservices.mas.gov.sg/statistics/dir/DomesticInterestRates.aspx.

3 1-month, 3-month and 6-month Compounded SORA are the average of daily SORA readings over the preceding one-, three- or six-month periods.

⁴ There may be slight differences in the all-in rate on the SOR and SORA packages at the point of conversion as Adjustment Spread (Retail) is computed based on the three-month average difference between SOR and SORA, rather than the current difference on the day of conversion. The use of a three-month average helps to mitigate against volatility in the day-to-day spread between SOR and SORA.

5 For example, the Adjustment Spread (Retail) published on 1 October 2021 may be applied to all SOR loans that are converted to the SORA Conversion Package in the month of October, depending on the individual financial institution’s terms and conditions for applying the rate.