Singapore Mortgage Home loans: Sibor or SOR rates

Fundamentals of how SIBOR and SOR move and why they move.

Which is safer? SIBOR rates or SOR rates even from very experienced Singapore property buyers and investors.

When does a Country Change or set their interest rates?

In the USA, the country is made up of many states coming together. There is a federal government and the state government. As the Federal government may not have the mandate and wide reaching powers and know-how to micro-manage the policies as every state’s economic condition is different. As a result, the USA mostly depends on a more granular mechanism such as using interest rates to control inflation and regulate growth.

In Singapore, the Singapore government can manage the country to a very fine detail. When the economy heats up and inflation grows, instead of raising interest rates to control inflation, Singapore could raise it’s currency value against a trade weighted basket of currencies. This reduces the prices of imports as the Singapore dollar strengthens. This has the effect of lowering inflation for Singapore citizens. However this also impacts certain industries which relies on exports.

Does Singapore Banks or Government or MAS set Interest rates targets for SIBOR or SOR?

Singapore’s interest rates are consistently set at a low level. Though we are not sure “SET” is the right word, because there are many factors including the liquidity of banks in Singapore which helps “SET” the interest rate environment. Banks that are flushed with cash from depositor’s funds who do not need all these funds will then release it into the Inter-bank market available to as funds to be borrowed by other financial institutions. The rate is called, the Singapore Inter-bank offered Rate (SIBOR). This is the rate at which the banks lend to each other and Sibor is traded and published in the Association of banks of Singapore (ABS).

Singapore’s interest rates are consistently lower than that of the US and that of Australia. This ensures that Gross Fixed capital investment is maintained at a higher level of which a significant portion goes into investment of plant, machinery, software, etc. All of which could significantly enhance the long term productivity and efficiency of the Country.

So why won’t Singapore’s economy over-heat?

Singapore’s Economy can over-heat just like any other with headline inflation soaring. However due to the various policies tools at the disposal of the Singapore government, it can selectively target industries that are over-heating by imposing levies, taxes or restrictions while leaving the other industries which are not over-heating to continue to grow.

Thus Singapore’s finely tuned micro-managed economy can maintain higher growth rates due to long term lower interest rates and a longer term lower unemployment rate.

Australia’s Bank interest rates versus Singapore’s SIBOR and SOR rates

Will Singapore’s interest rates reach the levels seen in Australia and US? It is hard to say whether Singapore will ever reach those rates seen in Australia or the USA, but on a comparative basis, Singapore’s interest rates tend to be lower than those in Australia and the USA.

When will Singapore’s Sibor or SOR rates rise? And why?

In most modern economies, credit is well developed. What this means is, when there are investments or economic activities, funds are being used up. For example, a project that costs $600 million may need financing of at least 60% of that fund. That means the company who invests in that project only comes out with capital of $240 million while borrowing $360 million. Even the company’s investment of $240 million may also come from issuing shares or bonds of the company, leaving the actual capital of the investment lesser than $240 million.

In other words, investments suck up excess capital and gradually deplete the funds of banks available for lending into the inter-bank market. This leads to an investment activity based and economic expansion based rise of rates.

The other instance is when there are major economic shocks where we do not know how much are the banks exposed to these shocks. In such a scenario, each bank will view the other one with suspicion as they do not know whether they will get back their money if they leave lend it out. In such a scenario, the SIBOR or SOR rates move up very quickly. In such scenario, it is expected that the Singapore Government would intervene to provide the liquidity of the last resort, thereby stabilizing the market.

So it is safe to say, when investment grows, funds are sucked up because most investments are still credit driven in a developed economy like Singapore.

Do you compare Sibor or SOR rates housing loans and mortgage refinancing?

Generally we do not recommend doing a SIBOR versus SOR comparison on rates, but rather put them side by side and evaluate what works for you.

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