You will be able to read a floating rate loan quoted as SORA plus a spread and explain how its rate changes.
When Marcus and Grace signed their loan, the banker described the rate as "three-month compounded SORA plus 0.8%". They nodded, signed, and only later realised neither of them could say what SORA was, how it was measured, or why their instalment changed every three months while the 0.8% stayed the same. Most borrowers in Singapore are in the same position. The quote is printed on the first page of the letter of offer, and it decides most of what they pay for twenty years or more.
This lesson takes that quote apart, so you can read any floating rate loan and know what will move and what will not. The 0.8% is the figure from Marcus and Grace's offer, which is an example; your spread will differ.
SORA, the Singapore Overnight Rate Average, is the average rate at which banks lend Singapore dollars to each other overnight, without collateral. It is built from actual transactions that took place that day, weighted by their size. MAS publishes it for each business day.
That last point matters. SORA is not a rate anyone decides or quotes. It records what banks actually paid each other to borrow overnight, which is why it is hard to manipulate and why it follows market conditions closely. In lesson 2.1, Why Singapore interest rates follow the US Fed, you saw how those market conditions are pulled towards US rates. SORA is where that pull shows up first in Singapore dollars.
If your parents took a home loan some years ago, it may have been priced off SIBOR or SOR. Those were older benchmarks. SIBOR was based on rates that a panel of banks submitted, which meant it partly rested on estimates. SOR was worked out from the foreign exchange market. Regulators around the world moved away from benchmarks of this kind towards ones built from real transactions, and in Singapore that meant SORA. SIBOR and SOR have been discontinued, and floating rate loans that used them were moved across.
So nearly every new floating rate home loan in Singapore today is pegged to SORA. HDB concessionary loans are the main exception: their rate is set by reference to the CPF Ordinary Account interest rate, so check the current HDB loan rate on the HDB website if that is what you have.
A home loan does not reset every night, so banks do not use the daily figure directly. They use compounded SORA: the daily rates over a past period, compounded together into one rate. MAS publishes compounded SORA for one, three and six months. Most home loans use the three-month figure.
Notice the direction. Three-month compounded SORA looks back over the previous three months. It tells you what overnight borrowing actually cost during that period. So when rates start rising, compounded SORA rises behind them, and when rates start falling, it falls behind them too. A floating rate loan always catches up with the market rather than leading it.
A loan priced at three-month compounded SORA plus a spread has two parts. The benchmark is published by MAS and moves with the market. The spread is the bank's margin, agreed in your letter of offer, and it does not move with the market.
Take Marcus and Grace's offer, with example figures. On their reset date, three-month compounded SORA is 2.5%. Their spread is 0.8%. Their loan rate for the next three months is 2.5% plus 0.8%, which is 3.3%. At the next reset, if compounded SORA has fallen to 2.0%, their rate becomes 2.8%. The spread has not changed; only the benchmark has.
Two details in the letter of offer are worth checking. First, how often the rate resets, which for a three-month benchmark is usually every three months. Second, whether the spread is the same every year. Some packages charge a lower spread in the first years and a higher one later, so the rate can rise at a set date even if SORA stays flat.
The other common package is a fixed rate for a set period, often with a lock-in. A fixed rate is a promise from the bank about the future. To price it, the bank looks at where it expects rates to be over that period, plus its own margin.
That is why fixed rate offers change as soon as expectations change. If markets start to expect the Fed to cut, banks can lower their fixed offers within weeks, while floating loans priced off backward-looking compounded SORA are still reflecting the higher rates of the past three months. When people say "fixed rates have come down but my floating rate hasn't", this is usually why.
Neither type is cheaper by nature. A fixed rate buys you certainty about the instalment for the fixed period. A floating rate passes market moves straight to you, in both directions. Which suits you depends on your budget headroom and your plans, which lesson 2.5, Stress-test your loans and savings for a rate move, helps you measure.
Pull out your letter of offer, or if you do not have a loan, a package published on a bank's website. Find the line that sets the rate. Rewrite it in the same shape as Marcus and Grace's: the benchmark, the spread, and how often it resets.
Find your loan's pricing or a published package and write it out as benchmark plus spread, noting how often the rate resets.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).