In Singapore, the loan packages offered by most banks and other financial institutions are tied to SIBOR or SOR. This is essentially a cost price to the banks, on top of which a margin, called the spread, is added.
The Singapore Interbank Offered Rate (SIBOR) is set by the Association of Singapore Banks (ABS) based on the interest rates at which banks offer funds to other banks in the interbank market; in other words, it is a benchmark interest rate at which banks in the zone can borrow funds from other banks in the Asian region.
The Exchange Offer Rate is also set by the ABS and is the average cost of funds used for business loans by banks and financial institutions. SOR is influenced by currency trading, which is unstable and has been affected in recent years by erratic world market and exchange rates.
For these latter reasons, SIBOR is more stable, and while SOR has the potential to be much lower, it can also experience dramatic fluctuations and outperform its “competitor”.
However, both rates are considered benchmark rates for real estate loans in Singapore and while they may differ drastically, they ultimately go in the same direction. That is, if the latest trend of the Singapore Interbank Offered Rate is increasing, the SOR will also increase. These two rates are the most popular on the market, due to their relatively simple concepts and their high accessibility and visibility. They can be found in well-known financial newspapers such as The Business Times and on websites such as Bloomberg. The Singapore Interbank Offer Rate and the Swap Offer Rate are shared with multiple banks, giving them a shared risk, unlike variable or internal rates, which are only used by a few banks.
Choosing a home loan from a certain bank means you’ll have to choose between fixed or variable rate packages. In the event that you choose floating rates, you will have three options: a SIBOR-linked package, a SOR-linked package, or a package with fixed rates at the bank’s board rate. Most banks in Singapore will offer one or three month SIBOR/SOR rates, although they actually come in one, two, three, six, nine and twelve month formats.
The problem with the interest rates offered by banks is transparency. When choosing between SIBOR/SOR and Bank Board Rates, you’ll need to consider this and ensure that the bank or financial institution you choose is transparent with its interest rates. Floating rate packages linked to board rates that banks set are risky, so make sure you have enough information about the option you are considering.