From floating- to fixed-rate loans: Options for customers still on SOR-based property loans

Amid the current rising interest rate environment, banks in Singapore are receiving many enquiries from customers about their loan packages and how best to cope with the situation. 

For customers who have yet to switch out of their SOR-based property loan packages, it is now an opportune time to relook at the options available and pick a suitable one. As at end-March 2022, there remained about 5,000 customers with SOR-based retail loans.
 
Under the roadmap drawn up by the Steering Committee for SOR & SIBOR Transition to SORA (SC-STS), an industry committee established by the Monetary Authority of Singapore (MAS) in August 2019 to support a smooth transition to SORA, customers with SOR-based retail loans have until Aug 31, 2022, to switch to a different loan package.

There are a number of options available to customers. The options are set out below to help customers pick the best one which suits their needs. Do note that the packages offered by each bank may differ. It is best to check with your bank on the options available. 

Option 1. SORA Conversion Package and other types of SORA-based loans

Similar to SOR, SORA-based loans are floating rate loans, and the interest paid by customers will change periodically depending on movements in SORA.

SORA, which has been administered and published daily by MAS since 2005, is the volume-weighted average rate of overnight, unsecured borrowing transactions between banks in the Singapore cash market. 

The three-month compounded SORA is the most commonly offered tenor setting for SORA loan packages, which is computed by taking the compounded average of daily SORA over the preceding three months. The averaging effect of compounded SORA helps to smooth out day-to-day fluctuations in interest rates, providing for more stable interest payments. Apart from the three-month compounded SORA, some banks could offer other tenor settings such as the one-month compounded SORA.

Compared with SOR and SIBOR, SORA readings are more robust as they are underpinned by a deep and liquid overnight interbank funding market.

The SORA Conversion Package is one type of SORA-based loan which customers can choose from. The SORA Conversion Package has been designed to minimise the difference in interest payments at the point of conversion from SOR to SORA. The SORA Conversion Package, which is the same across all banks, is offered at no extra cost or lock-in period to the bank’s existing customers on SOR-based property loans.

The SORA Conversion Package is tied to the three-month Compounded SORA. An adjustment spread is included when converting from the SOR-based loan to the SORA Conversion Package to account for the term and credit risk present in SOR but not in SORA. The adjustment spread would be dependent on the month of conversion, and would remain fixed for the remaining tenor of the loan. 

It should be highlighted that if customers’ SOR-based retail loans are not switched out by Aug 31, 2022, it will be automatically converted to the SORA Conversion Package in October 2022 and the adjustment spread applied will be that published by ABS as at Sept 1, 2022.