SOR is soaring..!

A KEY interest rate that determines how much home owners pay on their mortgages is continuing to rise and is likely to increase further.

Borrowers could be facing hundreds of dollar a month in extra repayments in the wake of the steadily increasing swap offer rate (SOR) as the benchmark rate is called.

It was at 0.53428% yesterday - down a touch from the 23-month high of 0.56185 it hit on Dec 15 but still well above the rare negative level of -0.6987% it dived to in August.

The SOR has also increased more than the other key interest rate linked to mortgages - the Sibor (Singapore Interbank Offered Rate).

That was at 0.3985 yesterday, up 5 basis points since last August.

The weak Singdollar in recent months and rising borrowing costs amid the global credit squeeze are behind the SOR's rise of 1.23 percentage points since that low point.

Whatever the reasons, home owners with SOR-linked loans are facing repayments of about 50 basis points higher once the movement from the negative level is taken into account.

A borrower who took out a $1 million loan over 20 years back in August is now paying about $250 more a month in the first year on the initial repayment of $4,688.72, assuming no other charges to the conditions.

As the SOR has been increasing steadily since August, the monthly repayments would also have risen in tandem. The extra interest paid works out to around $5,000 a year.

In August, when the SOR went into negative territory, banks had to invoke special clauses to floor SOR rates at zero. Otherwise, they would have been in the strange position of having to pay borrowers for taking out a loan.

Only ANZ Bank and the Bank Of China offer SOR-pegged loans now.

The SOR is fixed daily by the Association of Banks in Singapore using a formula that takes into account the current and expected exchange rates of the US dollar against the Singdollar and the local interbank lending rates for the greenback.

OCBC Bank economist Selena Ling expects the SOR to keep rising, hitting 0.55% this year as the economic conditions will probably not change in the foreseeable future.

Mr Rohit Arora, Barclays Capital's emerging markets fixed-income strategist, thinks the SOR could even reach 0.7% by the end of the year if the euro zone crisis worsens.

Currency experts say that the Singdollar is likely to stay weak against the greenback for the first half of the year - just the sort of conditions that will keep the SOR trending up.

The US dollar is heading north because investors around the world are bailing out of almost every other assets and seeking safety in the old standby of the greenback.

UOB economists expect the Singdollar to fall to $1.33 against the greenback this quarter, with more declines in store in light of the global economic woes.

UOB economist Chow Penn Nee said: "We think the unresolved crisis in the euro zone will continue to weigh on the Singdollar and will be the key factor in guiding (its) direction."

"So far, European Central Bank measures, such as providing liquidity for banks to participate in European sovereign debt, are only stop-gap measures, which do not solve the debt problems."

But home owners who have a loan pegged to the SOR should not rush to refinance as they may incur additional administrative costs.

Mr Vinod Nair, chief executive of Smartloans.sg, which offers home loan comparisons, said: "My opinion is that if they are on SOR, they should stick to it because the SOR is still at an acceptable rate."

Mr Nair advised that only when the difference between the SOR (now at 0.53428%) and the Sibor (now at 0.3958%) exceeds 0.5 percentage points should homebuyers look for alternatives.

Source: The Straits Times

Back in August 2010 when SOR was hovering around negative territory, the wife and I were cautioning anyone who bothered to listen that the low interest rates are not sustainable. We also raised concerns about possible rate hikes in the foreseeable future . But some of our friends (esp. those who had taken a second SOR-based home loan for their investment property) had waved off our concerns. How high can the rates possibly go given the low base-level, they said. It'll be silly not to take full advantage of the "cheap money" that the banks are offering, they added.

Now that SOR has risen by a whopping 1.23% in just 4 months, we wonder how much longer the monies offered by our banks will remain... "cheap".

And speaking of banks, we also wonder if any of those who had discontinued their SOR-based packages back in August 2010 (citing reasons like SOR-based loans are unsuitable for property buyers who buy residential property for owner occupation, in view of their inherent volatility and the long-term nature of mortgage loans) will do an about-turn now that SOR is back in the positive and rising...

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Will the US$ Sibor rates affect home loan rates?

As reported in The Business Times today, the US-Dollar Sibor rates are at 52-week high.

Two questions come to mind:

1. Does this mean that the local Sibor-pegged loan rates will increase in tandem with the US$ Sibor rates increase?

2. Will we soon see a return of SOR-pegged housing loans, since we understand that the Singapore-US$ swap rates are set to increase?

Maybe some of you financial/banking folks out there can shed some light on the matter...

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MAS says: Current (monetary) policy settings appropriate

The Monetary Authority of Singapore (MAS) said its current policy settings are appropriate, and domestic money markets are functioning in "an orderly manner".

The central bank added it has had "no need to undertake any extraordinary measures".

The MAS was responding to media queries on recent market movements in the Singdollar Swap Offer Rate (SOR).

The SOR went negative a week ago.

SOR is an interest rate against which many corporate and mortgage loans are benchmarked.

Part of the downward pressure on the SOR has come from higher capital inflows.

The MAS said it also reflects "market expectations of the exchange rate".

The MAS noted that some investors had sought the safety of short term cash deposits because of the turmoil in global markets.

The MAS said its policy stance remains as that announced in its April 2011 statement. In April, the central bank effectively allowed the Singapore dollar to appreciate against a basket of currencies by re-centering the currency's band upwards.

The next MAS policy statement is due in mid-October.

Analysts said the negative SOR reading may mean banks will have to alter the way they are lending money.

Song Seng Wun, regional economist at CIMB Research, said: "....the banks are going to say 'oh look, what we used to price mortgage loans is now not applicable, we may have to switch to an alternative rate'....based on the Singapore Inter Bank Offer Rate (SIBOR), for instance, which is much more practical, because at least it is still in positive territory although it is still rather low at this point."

Source: Channel News Asia

Short of sounding like a broken record, the wife and I will much rather the banks "calling a spade a spade" on the switchover to SIBOR, rather than taking the supposed moral grounds such as:

• "Meeting customers’ demand for a less volatile reference rate" - So SOR is only considered "more volatile" after it had gone negative?

• "Due to their inherent volatility and the long-term nature of mortgage loans, SOR-pegged products are deemed unsuitable for borrowers who buy residential property for owner occupation" - If this is the case, shouldn't the bank not offer such loan packages to private home buyers in the first place?

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Even Sibor is now at record low!

One of the main benchmark interest rates here fell by nearly 20% to a record low of 0.36% last week, after hovering around 0.44 for a year.

The three-month Singapore inter-bank offered rate (Sibor) or interbank rate is a widely used reference point for loans such as mortgages.

Local interest rates have plunged to all-time lows, following the US long-term debt rating downgrade, as well as a pledge by the US Federal Reserve to keep US rates at rock bottom levels till mid-2013.

This has led to fund inflows from investors looking to havens such as Singapore.

In another first, the other commonly used benchmark, the swap offer rate (SOR), fell below zero last week. Yesterday, it was at -0.0981, slightly up from its record low of -0.69870 last Thursday. While this may give borrowers more reason to cheer, analysts caution that such low interest rates may not be good for the economy in the long run.

UBS chief investment strategist for Singapore Kelvin Tay said cheap loans may mean the property market is too buoyant.

HSBC chief economist Leif Eskersen said he does not think that rates are likely to rise in the near future. OCBC economist Selena Ling agreed, saying that she expected short-term Sibor to remain low.

Local banks have not declared any plans to increase spreads – the gap between the cost of funds and the rate at which they are lent to customers. A DBS Bank spokesman said the bank has not increased the spread on Sibor loans, and would “continue to price loans based on the tenure and size of the loan, as well as the credit risk rating of our corporate customers”.

Maybank consumer banking head Helen Neo said spreads for Sibor loans had not gone up. The bank uses Sibor mainly for home loans.

HSBC’s head of retail banking and wealth management, Mr Paul Arrowsmith, agreed, saying: “HSBC is monitoring the market situation closely to ensure that our package remains competitive.” Currently, the bank only offers Sibor-pegged loans.

However, analysts do not think the low interest rates and moderating loan growths will substantially affect the local banks’ net interest incomes in the third quarter.

Source: The Straits Times

The falling Sibor rates is good news indeed, especially to the wife and I who have recently taken up a home loan pegged to Sibor (and were red in envy when SOR went negative!).

However, we cannot help but wonder if our banks will start pulling back on Sibor-linked home loans if such rates are to go negative too (unlikely scenerio but will you bet against it happening?), much like what they have done with their SOR packages.

So back to the good old days of fixed-interest loans, maybe...?
 

Say goodbye to SOR-pegged home loans soon?

A number of mortgage brokers have received word from two banks to stop offering home loans pegged to Swap Offer Rates (SORs), BT has learnt. Another bank, too, has introduced a new clause into offer letters setting a floor for the SOR used in its home loans.

All these are taking place at a time when SORs for certain time periods have turned negative. The three-month SOR reached a new low yesterday, dropping to -0.6987 from -0.0119 on Wednesday. The six-month SOR also fell further to -0.99258 from -0.06622.

The SOR represents the synthetic cost of borrowing Singapore dollars, by borrowing US dollars for the same maturity and swapping these in return for Sing dollars.

Unusual market conditions have forced SORs into negative territory. Economists attributed this to fund inflows – investors have flocked to safe havens such as Singapore especially after the United States lost its triple-A rating. The expected appreciation of the Sing dollar against the greenback has also pushed SORs down, they said.

Negative SORs put banks which offer SOR-linked home loans in a difficult position. Banks typically set mortgage rates at a spread above the three-month SOR. The lower the SOR, the less they earn.

“I think the banks will shift away from SOR-plus mortgages given the increased volatility that’s been seen,” said Bank of America Merrill Lynch economist Chua Hak Bin.

Some mortgage brokers told BT yesterday that they received notifications from DBS Group and Maybank to stop offering SOR packages from the banks, with immediate effect.

DBS did not confirm this, but a spokesman said: “SOR-pegged loans are not part of our standard offerings. In view of their inherent volatility and the long-term nature of mortgage loans, such products are deemed unsuitable for retail customers who buy residential property for owner occupation.

“As such, they form a very small part of our portfolio and are usually offered upon customer’s request. Our terms and conditions do allow the bank to introduce a minimum or floor rate for such benchmarks.”

The bank also said that its floating home loans are mainly tied to the Singapore Interbank Offered Rate (Sibor).

As for Maybank Singapore, its consumer banking head Helen Neo said: “We currently do not offer SOR-pegged loans.”

Just a few months ago in April, Maybank has introduced a new package called the ceiling-rate home loan that is pegged to the three-month SOR.

The bank launched it together with another product called the hybrid-rate home loan, which is pegged to either the Sibor or a fixed rate in different years. Ms Neo said yesterday that the hybrid-rate home loan is now the bank’s most popular one.

Some banks had moved earlier to withdraw SOR-pegged home laons from the market.

According to a United Overseas Bank spokesman, the bank stopped selling SOR-pegged packages with effect from Aug 1 and introduced Sibor-pegged packages to meet customers’ demand for a less volatile reference rate”.

On the other side of the fence is Australia and New Zealand Banking Group (ANZ), which will continue to offer SOR-linked home loans. However, it added a new clause to offer letters issued from yesterday, setting a floor of 0.1% for the SOR used. This is to “ensure greater clarity on our pricing structure”, said ANZ Singapore head of retail banking and wealth management Philip Lim.

ANZ’s home loans are either pegged to the three-month Sibor or SOR. The rates are based on those fixed on the first business day of the month, so the recent negative SORs have not affected home loan rates, Mr Lim said.

“We are currently comfortable to continue offering SOR-pegged home loan packages,” Mr Lim added.

Source: The Business Times

When the wife and I said yesterday that we are unconvinced about the sustainability of the depressed SOR rate, we certainly did not expect it would come in the form of our banks pulling the plug on SOR-pegged home loans.

While we can barely appreciate the need for banks to set a floor for the SOR used (although we reckon it has more to do with protecting the banks’ bottom-line rather than “ensuring greater clarity on the pricing system”), we are absolutely astounded by the reasons given by banks that have stopped offering SOR packages.

If banks have stopped selling SOR-pegged packages because they are listening to customers’ demand for a less volatile reference rate, why was the decision to terminate made only when SOR started to plummet and eventually gone negative?

And if SOR-pegged loans are indeed unsuitable for property buyers who buy residential property for owner occupation (supposedly due to their inherent volatility and the long term nature of mortgage loans), maybe the Monetary Authority of Singapore should consider outlawing banks from offering such packages for residential home loans?

We recall a time not that long ago (when the USA was still triple-A rated and SOR was positive) whereby some banks will only offer home loan packages linked to SOR. And if you ask for other non-SOR packages, it will be met with great reluctance and at much higher interest rates.

After the dust is settled and SOR starts to climb again, it will be interesting to hear the kind of “justifications” that banks will come up with to restart their SOR-pegged home loan packages again…

Watch this space!

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SOR has gone negative...but for how long?

Borrowers cheered yesterday as the swap offer rate (SOR), a benchmark interest rate that mortgage rates are commonly pegged to, fell below zero for the first time.

In a historic moment for Singapore’s banking industry, the three-month SOR plunged to -0.0119%.

The SOR, which is fixed by the Association of Banks in Singapore daily, represents the average cost of funds that banks in Singapore use for commercial lending. It also factors in exchange rate movements.

Traditionally, the SOR is more volatile than the Singapore inter-bank offered rate (Sibor), which is the other benchmark interest rate in Singapore.

A negative rate is startling because in economic theory, it implies that banks are so flush with cash that they now charge a “fee”- as opposed to paying interest – for accepting deposits.

Bankers said yesterday that this is happening because investors are switching out of the US dollar, and there are increased cash flows into Singapore.

The Singdollar to US dollar exchange rate also affects the SOR. With a weakening greenback, the SOR will continue to fall.

Banks here typically peg their loan packages to the Sibor or SOR, plus a profit margin.

But don’t expect banks to end up paying their customers to borrow from them.

OCBC Bank and UOB, which have loans packages pegged to the SOR, have said that there are clauses to “floor” the rates at zero, even if the SOR is negative.

Still, Mr Vinod Nair, chief executive of website Smartloans.sg, which offers home loan comparisons, said: “I think now is a great time to refinance home loans, and I don’t expect the SOR to rebound in the next few years, so there should not be an issue with volatility.”

Home owners taking up new Sibor-pegged property loans pay between 1% and 1.33%, while loans pegged to the SOR may end up paying between zero and 0.6% with the new SOR rates, he noted.

Indeed, some economists believe that SOR rates are likely to remain low for a while yet.

UOB economist Chow Penn Nee said some factors that will keep interest rates low include the United States Federal Reserve’s announcement that interest rates will be kept low until mid-2013.

Also, with the Monetary Authority of Singapore’s current monetary policy stance of a Singdollar appreciation, the US dollar is likely to fall against the Singdollar.

This will mean even more funds flowing into Singapore, which still has a triple-A rating and is considered an alternative to the US dollar.

Mr Saktiandi Supaat, Maybank’s head of forex research, said: “we may see a rebound if there is some intervention by the MAS or if the forward rate changes due to market developments. But given the already low SOR rates we are seeing over the past year or so at around 0.2%, the rebound may not be so soon.”

Barclays Capital economist Leong Wai Ho, on the other hand, does not think that the depressed SOR will persist.

He said: “This is not considered equilibrium, and can’t last too long. It counters the macro-prudentials that have been put in place to lighten property speculation.”

“I think this may be an MAS move to discourage fund flows into Singapore. It may last for two weeks, until we get over the phase of our lives that we are worried about the US downgrade.”

Source: the Straits Times

Unfortunately, the home loan that the wife and I took up recently is pegged to Sibor. And without sounding like sour grapes here, we tend to agree with Mr Leong about the sustainability of such depressed SOR rates. However, it does provide some cheers at least to consumers and probably a temporary respite to some home owners. This is especially after the slew of bad news we have been hit with recently - the continual “bloodshed” seen in the stock markets and technical recession looming for the Singapore economy.  

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