OCBC Bank launches Singapore's first SORA-based home loan
OCBC Bank has launched Singapore’s first home loan package referencing Singapore Overnight Rate Average (SORA). The OCBC 90-Day SORA home loan package is another first by the Bank in the industry’s transition roadmap towards adopting SORA as a new interest rate benchmark for the Singapore Dollar cash and derivatives markets. SORA is the average rate of unsecured overnight interbank Singapore Dollar transactions brokered in Singapore from 9.00am to 6.15 pm daily and has been published by the Monetary Authority of Singapore (MAS) since 1 July 2005.
The OCBC 90-Day SORA Home Loan is available to buyers of completed private properties with a minimum loan size of S$1 million. The interest rate is calculated based on the simple average of the daily SORA rates over the past 90 calendar days to determine the repayment in advance. The loan package has a one-year lock-in period, which means customers can choose to switch to another home loan package after the one-year lock-in period at no cost. Customers have the flexibility to make pre-payments of up to 50% of the loan amount in the first year without any penalty fee.
How the 90-Day SORA interest rate is calculated
SORA is a backward-looking overnight rate as compared to a forward-looking reference rate commonly used for floating home loan packages in Singapore, such as Singapore Interbank Offered Rate (SIBOR) where the interest rate is determined at the start of the interest period.
The OCBC 90-Day SORA home loan interest rate is calculated based on the simple average of the daily SORA rates of the past 90 calendar days in advance of the loan repayment period.
The 90-Day SORA value is updated every month instead of every three months for a particular loan. To determine the interest amount for the first month, the applicable SORA-based interest rate is computed using the simple average of the past 90-day SORA rates from the day of the loan disbursement, which means computation includes the SORA rate on the day of the loan disbursement and the daily SORA rate over the preceding 89 days.
Thereafter, the SORA-based interest rate is calculated again using the simple average of the past 90-Day SORA rates from the first day of the next interest period. This process is repeated every month.
At the start of every interest period - customers are given advance notice of the SORA-based interest rate to be paid for the coming month. As such, customers know upfront the exact interest rate to be charged for the coming one month and the instalment to be paid. This methodology helps customers better plan their finances. (Refer to Annex A for an illustration on how this works).
Mr Sunny Quek, Head, Consumer Financial Services Singapore, OCBC Bank, said, “We are pleased to launch the first retail SORA-pegged home loan as the industry take steps to move towards referencing overnight risk-free rate which provides for greater stability and transparency. With this launch, we are offering a more comprehensive range of home loan options. As this product is the first-of-its-kind in the market, we would like to give customers the opportunity to discover more about this product, and to better understand SORA as a new reference interest rate.”
The use of SORA calculated over the 90-day period computed on simple average basis has several benefits:
A summary of the key differences between a 3M SIBOR and 90-Day SORA home loan package is set out below:
|3M SIBOR||90-DAY SORA|
|What is it||
Pegged to the 3-month SIBOR and reviewed every 3 months
Instalments can increase or decrease depending on the SIBOR rate
The average of the daily SORA rates over the past 90 calendar days.
|How is the reference rate determined||
SIBOR is based on the interest rates used by banks in Singapore when lending unsecured funds to each other. Simply put, SIBOR reflects how much it would cost banks to borrow from each other.
SIBOR is administered by the ABS Benchmarks Administration Co Pte Ltd (ABS Co.).
On a daily basis, the rates from 20 banks are compiled and the compiled rates are then ranked. Those on the upper and lower quartiles eliminated from the list. The remaining rates (which should come from at 10 banks) are averaged to make the day’s SIBOR.
SORA is the average rate of unsecured overnight interbank SGD transactions brokered in Singapore from 9.00 am to 6.15 pm, published publicly by MAS daily since 1 July 2005.
Thereafter: 3M SIBOR + 1.00%
Illustration: Determining the ‘90-day simple average in advance’ SORA rate
The OCBC 90-day SORA rate is determined by taking a simple average of the daily SORA rates of the past 90 calendar days. The 90-day SORA rate is then applied in advance on the loan amount to calculate the interest amount to be paid for the coming one month.