Thu. Jan 27th, 2022

SIBOR stands for Singapore Interbank Offered Rate. It is the benchmark interest rate for interbank loans in the Asian market. Banks need to maintain a certain level of short-term cash reserves and, if a particular bank does not have enough liquidity, it can borrow from the Singapore interbank market at the Singapore interbank offer rate. The duration of these loans can vary from day to day. The Singapore Monetary Authority (MAS) adjusts market liquidity by adjusting capital requirements for banks. Recently, on April 7, 2020, the MAS adjusted the capital and liquidity requirements of banks to help maintain their lending activities amid the COVID-19 pandemic. Simply put, the operation of a bank is to collect money from savers and lend it to borrowers with interest. If there was no control, profit-driven banks would lend almost all the money they collected from savers. This would put banks in a precarious position if a large number of savers made withdrawals. To prevent a banking operation, the regulatory body, in this case, MAS, should intervene to regulate the amount of liquid cash that a bank had to hold to amortize possible withdrawals. This reserve requirement can also be used to encourage lending and regulate the amount of liquidity in the market. If more liquidity is needed in the market, this requirement can be reduced and, if the economy is filled with too much liquidity and overheating, this reserve requirement can be increased.

SIBOR is administered by the Singapore Banking Association (ABS). ABS publishes SIBOR prices and trends on its website. There are four SIBOR rates. 1, 3, 6 and 12 months. Typically, one-month SIBOR rates are lower and 12-month rates are the highest.

SOR stands for Swap Offer Rate. It is the synthetic rate of Singapore dollar deposits. It is cost effective if we were to borrow US dollars for a certain maturity and exchanging US dollars for Singapore dollars.

SOR rates and trends can also be found on the ABS website.

SOR is used less frequently in home loan packages. The last thing I checked, most banks used SIBOR to set home loan rates. SIBOR at 1 and 3 months is the most frequently used metric to establish home loan rates.

SIBOR is often called the cost of funds by the bank. This is the rate at which banks can borrow money on the free market. If a lender offered them a higher rate than SIBOR, they would have to borrow from the SIBOR interbank market. They can obtain funds at rates lower than SIBOR, but in the event that they have a borrower who would like to borrow to buy a property and need to make a loan, they could borrow from SIBOR if they did not have the necessary funds. Home loan rates are usually SIBOR plus a spread. This differential serves to compensate the bank for having taken out the loan, assuming the risk, administrative costs and other related costs. If SIBOR increases, the rest is constant, the interest rate on the real estate loan will increase accordingly. When writing, UOB offers a package with the following details:

2-year lock

Year 1: 3-month SIBOR + 0.63% (effective rate: 1.38%)
2nd year: 3-month SIBOR + 0.63% (effective rate: 1.38%)
Year 3 and later: 3-month SIBOR + 0.63% (effective rate: 1.38%)

Current three-month SIBOR: 0.75% (as of May 5, 2020)

Partial payment penalty: null, as long as the outstanding loan remains within the closing period. The loan does not fall below $ 200,000 SGD

Total repayment penalty: 1.5% of the outstanding amount of the loan if the loan is redeemed within 2 years of the first disbursement. For repayment for sale: 50% reduction of the penalty in advance + 50% repayment for new loan contracted within 6 months from the date of repayment. The amount of the new loan must be more or less equal to the amount of the loan exchanged.

Additional feature: Free conversion once after blocking two years from the date of the first disbursement.

This package uses the three-month SIBOR and the spread if 0.63%. Other banks may also have similar packages, but their difference may be different. There are many packages to suit different customers. It would be advisable to consider other loan packages if homeowners want to dispose of their property within the closing period. This is especially true for homeowners who are looking for a home loan package when they refinance their loan. There are cases where homeowners had to bear the penalty of full amortization when they sold their property.

SIBOR is primarily affected by global trends, especially the US federal funds rate. If SIBOR is significantly higher than rates around the world, banks could only borrow from other institutions at a lower rate. Thus, if global interest rates are low, SIBOR will remain the same. As for those who want to take out a home loan, if you think the world economy will be weak for the next two or three years, you might consider a home loan package that is linked to SIBOR, already that SIBOR will remain depressed.

Yours faithfully,

Daryl Lum

ps If in doubt, seek mortgage advice. I am working with some mortgage specialists on a comparison site. You can visit https://easilyloan.sg/ for loan type comparisons and affordability calculators.

Other related articles:

How to Choose the Best Home Loan

Can a Foreigner Get a Real Estate Loan in Thailand?



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