Bank 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 other.
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 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 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 Points
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 was rising. It could make a comeback when interest rates drop.
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 but can also make a comeback in the future.
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. 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.