Loan Reference Rates
SIBOR, SOR, Combo and Fixed Deposit Rates are some of the most
common reference rates that Singapore banks peg their floating rate
loans to. The reference rates are updated daily and may be the average
of 1 month rates, 3 month rates, 6 month rates or even 12 month
rates. Choosing a loan with the right reference rate can help a
borrower save on loan repayments every month. Let us breakdown the
differences between the various reference rates and compare them
against each other.
SOR or Swap Offer Rate
SOR is derived using this formula:
USD/SGD Forward Rate = USD/SGD Spot Rate +/- SWAP
To make it a bit less complicated, it is basically the interest
rate that you will pay if you were to borrow in US dollars. Unlike
most reference rates which depend mostly on the liquidity in the
banking system, SOR is also heavily influenced by the exchange rate
movement of USD/SGD. This is the main reason why SOR is the most
volatile among the mentioned reference rates. SOR is usually lower
than SIBOR in periods of decreasing interest rates due to Singapore
Dollar's appreciation and higher than SIBOR in periods of increasing
interest rates due to Singapore Dollar's deppreciation.
SIBOR or Singapore InterBank Offer Rate
SIBOR is the
interest rate that Singapore banks borrow from each other and is
widely regarded as the most transparent rate due to its widespread
use among banks. It is affected by the liquidity in the Singapore
banking system which is in turn affected by the liquidity in the
global banking system. It usually rises and falls in tandem with
US interest rates.
Combo Rate or Combination of SIBOR Rate and SOR Rate
Combo is the average of SIBOR rate and SOR rate and provides borrowers
the advantage of a reference rate that is in between SIBOR and SOR.
Borrowers will borrow at a rate that is lower than SIBOR in periods
of decreasing interest rates and borrow at a rate that is lower
than SOR in periods of increasing interest rates. This reference
rate caters mostly to customers who cannot decide between SIBOR
Fixed Deposit Rates or FHR/FDR/FDPR/FDMR
FHR/FDR/FDPR/FDMR is the fixed deposit rate (could be 9-month or
15-month or 18-month or 36-month or 48-month depending on the bank)
for the particular bank you are applying the loan from. It tends
to be the least volatile as banks usually adjust their fixed deposit
interest rate last even in a period of volatile interest rates.
It is gaining in popularity due to the low fixed deposit rates in
recent years leading to many different variations. However, fixed
deposit rates can be changed anytime at a bank's discretion and
is less transparent as compared to reference rates like SIBOR which
is set daily by the Association of Banks in Singapore.
Which Reference Rate to Choose?
All the above mentioned reference rates usually move in the same
direction as they are all mainly affected by the liquidity in the
banking system and economic situation in Singapore. In periods of
decreasing interest rates, borrowers will do well to borrow in SOR
as it is the most volatile and often decreases faster than the other
reference rates. However, interest rates and Singapore
SIBOR rate seemed to have bottomed out in between 2011 and
2014 and has been rising slowly ever since then. In periods of rising
interest rates, it will be more advisable to choose Fixed Deposit
Rates as a reference rate as it rises the slowest. Borrowers concerned
with Fixed Deposit Rates transparency can choose SIBOR which is
less volatile than SOR or COMBO.
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Deposit Rates for Singapore Loans