Wednesday, March 13, 2013

How Does Different Tenures of SIBOR and SOR Affect Borrowers?

The following is a guest post by Property Buyer



As Singapore has been largely dependent on importation in maintaining a small and open economy, it has literally adopted a policy for the exchange rate that significantly affects import-based inflation. MAS or Monetary Authority of Singapore is responsible for regulating and managing the Singapore dollar valuation against its main trading partners and their related currencies. Based on this perspective, we can say that the world money market actually determines the rise and fall of the interest rate in Singapore. The interest rate fluctuates as a result of this undisclosed band between the MAS and its trading partners. This is relevant to how the US Dollar became a main component in the basket of currency between trading countries. To explain the strength of the Singapore Dollar, we can refer to the way the US Dollar works within the basket of currency. This simply explains how currencies between trading partners work. 

Explaining the framework of SIBOR or Singapore Inter-bank Offered Rate

When banks or financial institutions lend to each other, they usually refer to an interest rate to base their inter-borrowings. They use SIBOR as their inter-bank rate or inter-borrowing rate. The rate is actually set by the Association of Banks in Singapore. It is being announced daily at the start of the trading day to the public and mainstream media. For your information, SIBOR works similarly to LIBOR or London Interbank Offered Rate. Most home loan rates in Singapore use the SIBOR rate.

In Singapore, SIBOR are available in 1 month, 3 months, 6 months, and 12 months tenure. Usually the longer the tenure of SIBOR , the higher would be its rate.

Understanding the SOR or Singapore Swap Offer Rate

The expected forward exchange rate of the USand Singaporedollars is the SOR. The SOR is also used as the lending cost, where upon maturity, the SOR is being used as the rate of the Forex conversion with no bid and spread from the US to Singaporedollar. The banks love to use the SOR because they save more by using this rate. However, it demonstrates more volatility than SIBOR. The Association of Banks in Singaporeset the SOR as the currency swap for the US dollar even though its currency movement directly influence the volume of the contracts and trading. SOR is offered in terms of 1 month, 3 months, 6 months, and 12 months.

SIBOR and SOR pegged home loans

This refers to variable or market pegged floating loan packages offered by most banks using the SIBOR or SOR rates. The interest rate for these loans  is the spread + SIBOR or SOR.

How do you define bank spread?

The profit margin that banks or other financing institutions use to gain income on top of the SIBOR or the SOR rate is called the spread. For example the SIBOR rate is 1%, then the bank would like to gain 2%. The 2% is the bank spread. This means that the client would get the SIBOR + spread = 1% + 2% = 3% rate. A few years after the start of the loan, the bank usually changes the spread. The revision usually reflects an increasing bank spread as shown below 
Period
Interest Rate (p.a.)
First Year
0.75% + 1-Month SIBOR
Second Year
0.75% + 1-Month SIBOR
Third Year
0.75% + 1-Month SIBOR
Fourth Year
1.00% + 1-Month SIBOR
Thereafter
1.25% + 1-Month SIBOR

What are the benefits of using either a SIBOR or a SOR rate?

We would like to correct the misconception of most people. You must understand that although the two correlate with each other, the SOR tends to fluctuate more and can be above or below the SIBOR rate. Please take a look at Figure 1, 2, and 3 below for clearer explanation

Figure 1: 1-Month SIBOR/SOR for Jan 2012-Dec 2012

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

Figure 3: 3-Month SIBOR/SOR for Dec 2006-Aug 2012
 Here is a piece of advice for those who are planning to apply for a housing loan: Always ask for the bank spread and evaluate the interest rate throughout the duration of the loan. Is the spread reasonable enough for you to take?

Differentiating the features of SIBOR and SOR

For both SIBOR and SOR,  their tenures are usually inversely related to their rates. For example, a 1-month SOR will be lower than a 12-month SOR.  This is because long term opportunities are more risky and normally incur higher opportunity cost.

A shorter tenure SIBOR is more volatile than a longer tenure SIBOR.

SOR fluctuates more than the SIBOR.

SIBOR tends to be preferred by risk-averse borrowers.

Recently banks started rolling out 1-month SIBOR packages which impact their administrative cost.

From Figure 4, we can see that the 1-month SIBOR is  lower than the 3-month SIBOR. Take a look at the historical trend for the last 20 years in Figure 4.

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

When is the right time to choose a 1 month or a 12 month SIBOR?

You must understand that choosing a shorter tenure SIBOR also means greater instability. The rates are being changed or modified in shorter intervals. This means that if you take the 1-month SIBOR rate, depending on the financing institution, you can get a change of rate in every 1 or 3 months. However, if you choose the 12-month SIBOR rate, you have the confidence that you will pay the same SIBOR rate for the next 12 months. You may find it beneficial to seek the advice of an expert before you decide which housing loan package to take. Free advice and loan package consultation may be obtained from http://www.iCompareLoan.com/or simply fill up an enquiry form at http://www.iCompareLoan.com/contact



For more related articles, please visit the following websites:
www.PropertyBuyer.com.sg/articles
www.SingaporeHomeLoan.net
www.iCompareLoan.com


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