OCBC has launched Singapore’s first home loan referencing the Singapore Overnight Rate Average (SORA), an alternative benchmark rate, available to buyers of completed private properties with a minimum loan size of S$1 million.
This is another step in the industry’s move toward adopting the SORA – the average rate of unsecured overnight interbank Singdollar (SGD) transactions brokered in Singapore – as the new interest rate benchmark for the SGD cash and derivatives market.?
Compounded SORA rates, which are backward-looking overnight rates, are thought to offer more stability compared to forward-looking term rates commonly used for floating home loan packages in Singapore, such as the Singapore Interbank Offered Rate (Sibor). Forward-looking term rates are more exposed to market factors on a single day’s fixing, such as quarter or year-end volatility.
OCBC’s head of consumer financial services Sunny Quek said in a press statement on Monday: “We are pleased to launch the first retail SORA-pegged home loan as the industry takes steps to move towards referencing an overnight risk-free rate, which provides for greater stability and transparency.”?
The interest rate for OCBC's 90-day SORA home loan is calculated based on the simple average of the daily SORA rates over the past 90 calendar days ahead of the loan repayment period. This rate is updated every month, instead of every three months, for a particular loan.
To help customers better plan their finances, the bank will notify them in advance – at the start of every interest period – of the SORA-based interest rate to be paid for the coming month. This allows them to know upfront the exact interest rate to be charged for the coming month, as well as the instalment to be paid.?
The applicable SORA-based interest rate for the first month is computed using the simple average of daily SORA rates on the day of loan disbursement and the preceding 89 days. This rate is then used to calculate the interest accrued for the first month.
This process is repeated every month, whereby the SORA-based interest rate is calculated again using the simple average of the past 90 days’ SORA rates from the first day of the next interest period.?
As an overnight lending and borrowing rate among banks, SORA lacks a term and credit risk premium. This results in SORA being typically lower than Sibor – at an average of 0.35 per cent, based on OCBC’s computations using variances between the rates from Jan 1, 2019 to June 30, 2020.
OCBC’s SORA loan package has a one-year lock-in period, which means customers can switch to another home loan package after a year at no cost.
Customers can also make pre-payments of up to 50 per cent of the loan amount in the first year without any penalty fee.
Banks in Singapore are expected to pilot more new SORA products in the second half of the year. The Swap Offer Rate (SOR) – the current benchmark used to price derivatives and business loans here?– will be replaced, given the end of scandal-tainted Libor after 2021, as the SOR uses the US dollar Libor in its computation.