Loan Reference Rates
SIBOR, Fixed Deposit Linked Rates and Board Rates are some of the
most common reference rates that Singapore banks peg their floating
rate loans to. Other reference rates include SOR and Combo Rates.
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.
Generally the shorter the time period the reference rate is
based on, the lower and more volatile the reference rate.
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
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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. The 1-Month
SIBOR rate is most commonly used for home loans due to its lower
rates even though the 3-Month SIBOR rate was more popular in the
past due to its higher stability.
Fixed Deposit Linked Rates or FHR/FDR/FDPR/FDMR
FHR/FDR/FDPR/FDMR is the fixed deposit rate (could be 8-month or
18-month or 24-month or 36-month or any number of months depending
on the bank) for the particular bank you are applying the loan from.
It tends to be the least volatile as compared to other reference
rates as banks usually adjust their fixed deposit interest rate
last even in a period of volatile interest rates. It was the most
popular reference rate in recent years due to the low fixed deposit
rates but ever since interest rates started rising, banks have been
quick to change their reference rates back to Board Rates probably
to shore up profitability. Different banks have different acronyms
for Fixed Deposit Linked rates but they are essentially the same.
Borrowers should be aware that 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.
Board Rate or Mortgage Rate or Mortgage Board Rate
Board rates / Mortgage Rates / Mortgage Board Rates are set internally
by banks according to their own funding or benchmark rates and the
overall loan rate is computed using banks’ board rates minus a discount
or a mortgage rate set by the banks themself. Similarly to Fixed
Deposit Linked rates, board rates can be changed anytime at a bank's
discretion and is less transparent as compared to reference rates
like SIBOR. There is an increasing trend of banks offering loan
packages linked to Board Rates to replace loan packages that were
originally Fixed-Deposit Linked Rates. This comes as a detriment
to borrowers as Board Rates are the least transparent among the
various reference rates with banks being able to price them as they
please even at short notices.
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. SOR has
become somewhat obsolete in recent years due to the fact that interest
rates have been rising.
Combo Rate or Combination of SIBOR Rate and SOR Rate
Combo rate 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 and SOR. Similarly to SOR, Combo rates have become somewhat
obsolete due to rising interest rates.
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 ever since then. In periods of rising interest
rates, it will be more advisable to choose Fixed Deposit Linked
rates as a reference rate as it rises the slowest. It is no coincidence
that banks have been slowly phasing out loan packages with Fixed
Deposit Linked rates as they have been unprofitable for the banks
in periods of rising interest rates. Borrowers concerned with Fixed
Deposit Rates transparency can choose SIBOR loan packages which
are historically the most popular among borrowers due to its transparency.
They can also go a step further and take up fixed
interest rate loans which usually guarantees a fixed rate for
up to 3 years before becoming a normal floating rate loan.