What Is A SORA-Based Home Loan And How Does It Work?

Deborah Gan

Deborah Gan

Last updated 20 December, 2021

No, SORA isn’t a newly-coined Gen-Z name. It’s a rate that banks use to calculate how much home loans they will be lending you. Not sure what it is? Here’s a guide to SORA-based bank loans in Singapore.

Applying for a house, visiting showrooms or listings, and planning out your ideal home aesthetic and renovation works is an exciting experience. And if you’re moving in with your significant other, the process is all the more exciting and surreal.

Aside from all the glitz and glamour of getting a home of your own, there’s also the (dreadful) home loans aspect that you’ll have to navigate through, unless you’ve got a six-digit figure idling in your savings account.

If you’re purchasing an HDB flat, you do have the option of choosing between an HDB loan and a bank loan. But if you’re gunning for a private property, you can only opt for a bank loan, such as flexible personal loans, to fight against the rising mortgage rates.

While there are bank loans that are based on Singapore Interbank Offered Rate (SIBOR), Singapore Swab Offer Rate (SOR) and Singapore Overnight Rate Average (SORA) rates, we’ll be deep-diving into everything you need to know about a SORA-based home loan, since they will be taking over the bank loan scene and replacing SIBOR and SOR when they phase out in 2024.

What are SORA-based home loans?

Singapore Overnight Rate Average, SORA for short, is a volume-weighted average rate of borrowing money from the insecure overnight interbank SGD cash market in Singapore. It’s a floating rate for bank home loans that are not fixed, where the rates are different each day based on the average over a set period of time.

SORA is normally calculated based on a one-month or three-month average, so it’s quite likely that you would have seen terms like ‘1M SORA’ or ‘3M Compounded SORA’ when you’re shopping around for a bank loan.

SORA rates are administered by the Monetary Authority of Singapore (MAS), so you can have a peace of mind knowing that the rates are reliable and plucked randomly by banks just to force you to pay a higher mortgage. The rates are also published at 9am on the next business day on the MAS website for transparency.

As mentioned above, bank loans are calculated based on SIBOR, SOR and SORA rates as of now. However, SORA will be the new benchmark interest rate that will be replacing SIBOR and SOR in 2024. When the time comes, you will have to switch to a SORA bank loan if your loan period ends after that.

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SORA vs SIBOR-based home loans

Aside from SORA, SIBOR is also quite a popular interbank rate for home loans. One of the main similarities between the two is that they are both floating home loans, meaning that they are always changing and fluctuating according to market conditions.

The most common versions used by banks for floating home loans are the 3M Compounded SORA and 3M SIBOR, meaning that the derived figure is an averaged rate over a period of three months.

The main difference, however, is that SIBOR rates are forward-looking in a sense that the SIBOR value is derived based on the future of the next rate-setting date, while SORA is backwards-looking as it is calculated based on the past historical data of daily SORA rates.

Because of this main difference, SORA is a good peg in theory since any large jumps in the market would have been evened out by the averaging of all the rates in the three-month period, meaning that a huge hike in rates would not be extremely detrimental to your mortgage rates. 

Compared to SIBOR pricing, the rate will immediately be repriced when there is a new and higher rate released based on market conditions since it takes into account the next rate-setting. 


How are home loans calculated based on SORA?

There’s actually a lot of calculation involved in getting the daily SORA rate, whether it is compounded for the past one month or three months. The reporting banks will pass on data on all applicable transitions during the period between 8am and 6.15pm daily, while MAS validates and calculates the data to give the daily SORA rates, which are published at 9am daily.

Depending on the one-month or three-month compounded SORA, the rates will be different. The reference rate stated on each bank’s website for their home loans can also change at any time according to the market conditions. However, they will normally inform you at least a month before so you can choose to reprice with another bank loan at a lower rate if you wish.

How much do I need to pay?

This is an example of how a bank loan might look like on a bank’s website.

2-year lock-in 3M SORA + 0.80% p.a.

Year Rates
First year to second year  3M SORA + 0.80% p.a.
Third year and thereafter 3M SORA + 1.00% p.a.

More often than not, banks will offer a lower spread rate for the first few years to incentivise homeowners to take up their home loan. In this case, the spread is an additional premium of 0.80% p.a. on top of the 3M SORA published by MAS, where the three-month period will be calculated from the day you take up the bank loan. 

There is also a two-year lock-in period which forces you to stick to the plan for the first two years. Repricing with another loan package will incur an additional fee that you’ll have to pay. After the third year, the spread increases to a 1% p.a. premium on top of the 3M SORA.

Considerations when deciding on home loans

HDB or bank loans (only for HDB flats)

Before you get your hands on the first loan that you find, you should consider whether you would prefer an HDB loan or a bank loan, provided you’re purchasing an HDB flat. If you’re gunning for a private property, your only option is a bank loan.

Though HDB loans are at a higher rate at 2.6% per annum compared to bank loans, HDB loans provide stability since they are fixed for the entire tenure. On top of that, they also require a lower downpayment at 10% compared to a bank loan that requires a downpayment of 25%.

Fixed or floating rates

While floating rates may be preferred over fixed rates for some, others may not share the same sentiment because of the differing financial situations and goals.

Fixed-rate packages are usually only fixed at the same interest rate for the first few years, giving homeowners a peace of mind knowing that the monthly repayments will remain at the same rate regardless of market conditions. The caveat? Fixed interest rates are usually slightly higher compared to floating rates since you are paying for certainty.

On the other hand, others may prefer floating rate packages to take advantage of the dips in the market that would translate into cheaper repayments. However, they should also factor in hikes in the market that could increase their reference interest rates and increase repayments.

Lock-in period

With bank loans, most packages have a lock-in period that ranges between zero and five years. During this lock-in period, homeowners are not allowed to reprice their home loans with another package or with another bank entirely, cancel the loan or make prepayments. If they wish to do so, they will be charged with a penalty that is usually about 2% to 5% of their remaining loan amount.

This is a way for the bank to incentivise buyers to stick with their original package, by also offering promotional rates in the first few years with a lower interest rate.

Total Debt Servicing Ratio (TDSR)

In Singapore, there is a Total Debt Servicing Ratio (TDSR) that limits the amount that you can spend on your monthly debt repayments to 60% of your gross monthly income. This is to ensure that no one borrows way above their means and falls into greater debt.

The 60% includes other loans like tuition fee loans, car loans and other financial obligations. So if you think you can just borrow the total amount of your house’s selling price, you’re mistaken. This rule is implemented by the government which means that all banks are required to follow it.

Now that you know everything you know about SORA-based home loans, it’s time to make your decision. But if you’re purchasing a private property anytime soon, you essentially only have SORA home loans as your only option since SORA and SIBOR pricing will be phased out soon. But hey, at least you now understand how home loans work!

Read these next:
Best Home Loans In Singapore 2022
How Much Can You Borrow For Your Home Loan?
Fixed vs. Floating Home Loan Rates: Which Suits You?
Best Bank Loans For Each Loan Type In Singapore (2022)
HDB Loan Vs Bank Loan: Which One Should You Go For?

A mahjong addict with an undying love for dogs, Deborah is always on the hunt for cheap deals because she is always broke. That is why she is attempting to be more financially savvy to be.. less broke


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