How Mortgage Loan Works?

A constant rate maintained over the lock-in period, usually ranging from 1 to 5 years, depending on your lock-in period. It is safe and not affected by the market. With fixed interest rates, it will be easier for you to manage your cash flow since your payments are the same throughout.

However, at the end of your lock-in period, your home loan interest rate will likely increase or change to a floating rate.

Fixed Deposit Home Rate (FHR) is a form of board rate which is fixed by the bank, instead of external market conditions. The FHR rate pegs your home loan to the bank's fixed deposit rates.

FHR rates also have a number next to them, most commonly FHR12 and FHR36. Again, this refers to the interest rate period - whether you are given the 12-month fixed deposit rate (FHR12), or the 36-month fixed deposit rate (FHR36).

If the bank were to raise its fixed deposit rates, they would also have to pay out more to everyone who deposited money with them. The bank cannot hide any intent to jack up interest rates as the bank has to advertise its fixed deposit rates, so you can always see it coming before deciding on refinancing.

Singapore Interbank Borrowing Offer Rate (SIBOR) is a transparent interbank borrowing rate that allows consumers to know exactly what the interbank market interest rate is and the interbank cost of borrowing. The rate is administered by the Association of Banks in Singapore (ABS).

There are four SIBOR tenures: 1, 3, 6, and 12-month with most banks in Singapore offering home loans or commercial industrial mortgages. A longer term tenure typically comes with a higher interest rate.

Each business day, the 20 banks that form the ABS panel submit at a rate based on the estimation of funds they could borrow on the interbank market. After removing the top and bottom quartiles, SIBOR is then set as the average of the remaining submissions.

The banks charge a certain bank margin spread above the prevailing SIBOR for the final aggregate mortgage rate, for example, 3-month SIBOR + 1%.

Singapore Overnight Rate Average is defined as the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore. The rate is administered by the Monetary Authority of Singapore (MAS).

During each business day in Singapore, reporting banks provide data on all eligible transactions traded and booked in the window between 8am and 6.15pm (both timings inclusive). MAS conducts thorough data validation checks and computes SORA by taking the volume-weighted average rate of all eligible transactions. SORA is then published on the MAS website the next business day at 9am.

Other benefits of SORA include the fact that it has been published since 2005, which means there is a long historical time series that market participants can analyse and use to model trends for risk management, asset-liability pricing and trading purposes. However, SORA options are very limited at the moment, which is why SIBOR-pegged home loans are still worth considering.

Swap Offer Rate is a benchmark pegged to the spot and foreign exchange rates of SGD and USD. As far as home loans are concerned, it is more or less obsolete, as those who previously had SOR home loan packages have since seen their loans converted to SORA packages.

Until 2017, SOR was one of the major alternatives to SIBOR. It was also used in combination with SIBOR to determine interest rates in some home loan packages. SOR is very dependent on the US economy and tends to be more volatile than SIBOR, although it generally trends in the same direction as SIBOR.

Given the uncertain future of the US economy, it's probably a good thing home loans are no longer pegged to SOR.

The banks charges a certain bank margin spread above the prevailing SOR Rate for the final aggregate mortgage rate (example 3M SOR + 1%).