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As we start to go further into 2024, Singapore homeowners are standing at a crossroads, the burning question of “Is A SORA vs Fixed Rate better?” always lingers. The decision to lock in the security of fixed rates or to gamble on the potential downturn of SORA-based loans is more than a mere financial choice—it’s a strategic move that could redefine one’s fiscal trajectory.

This blog delves into the critical considerations by answering five key questions that could illuminate your path to make an informed decision. Join us as we help you step confidently into a future where your mortgage aligns with your financial goals and the dynamics of the market.

Contents:

• How do SORA-based loans differ from fixed-rate loans?
• What are the benefits and risks of choosing a SORA-based rate?
• Is a fixed rate better than SORA?
• When is it better to choose a fixed rate over a SORA-based rate?
• How does the Fed interest rate affect SORA and fixed-rate mortgages?
• Mortgage rate predictions 2024 by the US Fed Reserve
• How do current SORA-based rates compare with available fixed rates in 2024?

Introduction: What is SORA?

The SORA rate is an interest rate benchmark that reflects the average rate banks lend to each other overnight in Singapore. It reflects the cost of unsecured funds in the Singaporean market, making it a dynamic and market-driven rate.

What affects the SORA rate?

Several factors influence SORA:

• Monetary Policy: Decisions by the Monetary Authority of Singapore (MAS).
• Market Liquidity: The availability of funds in the market.
• Economic Conditions: Overall health of the Singaporean and global economies.

Q1. How do SORA-based loans differ from fixed-rate loans?

SORA-based and fixed-rate loans differ fundamentally in how their interest rates are determined, which directly impacts the predictability and potential cost of the home loan over time.

1. Interest Rate Variability:

SORA-based Loans: The interest rate is tied to the SORA, a daily-revised rate based on the average of actual borrowing transactions between banks in Singapore. As a result, the interest rate on your home loan varies throughout the tenure of the loan based on the current market conditions.

In Singapore, banks offer mortgages pegged to the 3M or 1M SORA rate which means your mortgage repayments can fluctuate either monthly or quarterly over the loan term.

Fixed-Rate Loans: These loans have an interest rate that remains constant throughout the lock-in period. Regardless of market fluctuations or changes in SORA, your interest payments stay the same during that specific period, offering a predictable and stable repayment schedule.

2. Risk and Cost Considerations

SORA-based Loans: The primary risk here is the uncertainty regarding future payment amounts. If SORA increases, your loan payments will increase, which could strain your budget if you’re unprepared for higher costs. However, there’s also a potential benefit; if SORA decreases, you might have to pay less interest over time than a fixed-rate loan.

Fixed-Rate Loans: The predictability comes with a trade-off. While you can “lock in” the rate and protect yourself from rising interest rates, you won’t benefit from any decreases in market rates. Usually, fixed-rate loans start with a slightly higher interest rate than SORA-rate loans to compensate the lender for this added predictability and stability.

3. Suitability for Borrowers

SORA-based Loans: These are usually preferred by borrowers who anticipate a decrease in interest rates or can accommodate the risk of fluctuating payments in their budget. They are also suitable for those not planning to hold the loan for its full term, as they might benefit from lower initial rates.

Fixed-Rate Loans: These are ideal for borrowers who value stability and budget around a consistent loan payment. They are particularly attractive in a low-interest-rate environment or when rates expect to rise in the next few months/years.

The choice between a SORA-based and a fixed-rate loan depends on your risk tolerance, financial stability, and expectations for interest rate movements. SORA-based loans offer the possibility of lower costs in a declining rate environment but come with the risk of payment variability.

Fixed-rate loans offer stability and predictability, ideal for long-term budgeting, but may cost more over time if interest rates fall.

Q2. What are the benefits and risks of choosing a SORA-based rate?

Choosing a SORA-based rate, which is pegged to the Singapore Overnight Rate Average, comes with its unique set of benefits and risks. These are primarily driven by the fluctuating nature of SORA, which can impact your loan repayments.

Benefits of choosing a SORA-based rate:

Potential for Lower Interest Payments. When SORA is low, a SORA-based loan can result in lower interest payments than a fixed-rate loan. It is particularly advantageous in a declining or low-interest-rate environment.

Flexibility with Market Changes. SORA-based rates adjust with market conditions, offering the opportunity to benefit from economic situations where interest rates are falling.

Transparency. SORA is a transparent, publicly available rate based on actual market transactions, making it a fair benchmark for your loan’s interest rate.

Opportunity for Refinancing. If interest rates drop significantly, a borrower can potentially refinance their home loan to capitalise on lower rates. It can lead to significant savings over time.

Risks of choosing a SORA-based rate:

Interest Rate Uncertainty. The primary risk with a SORA-based rate is the uncertainty and variability of loan repayments. If SORA increases, your interest payments will also rise, leading to higher overall costs and payment amounts that may not be as easy to budget.

Potential for Higher Costs Over Time. In a rising interest rate environment, you may end up paying more in interest over the life of the loan compared to a fixed-rate loan.

Budgeting Challenges. The fluctuating nature of SORA-based rates can make it challenging to budget effectively, as your loan payments can change periodically.

Economic Sensitivity. SORA is sensitive to broader economic conditions, meaning global financial crises or local economic downturns could lead to increased rates, which can affect your repayments.

Choosing a SORA-based interest rate offers the potential for lower interest payments in a favourable economic climate but requires readiness to manage the risks associated with rate fluctuations. The choice must be made after considering your current and projected economic conditions, your financial situation, and consultation with a financial adviser.

Q3. Is a fixed rate better than SORA?

The question of whether a fixed rate is better than a SORA-based rate largely depends on individual circ*mstances and market conditions. Neither option is inherently superior; each has advantages and disadvantages that make it more suitable for different situations.

Consider a scenario where you choose between a fixed-rate mortgage and a SORA-pegged home loan. With a fixed-rate mortgage, you get predictability, stability and peace of mind; your monthly payments remain the same for a specific period, which is great for budgeting and financial planning.

For instance, if you secure a fixed rate at 3% for 30 years, you’ll pay the same rate for a specified period even if market rates soar to 5% or 6%.

Advantages of Fixed Rate Loans:

Predictability and Stability. Fixed rates offer the certainty of knowing your mortgage repayments (for a specific time). It makes budgeting easier and eliminates the risk of rising interest rates impacting your repayments.

Ideal in Rising Interest Rate Environments. If you expect market interest rates to rise for two to three years, locking in a fixed-rate loan can save you money over the long term.

On the other hand, a SORA-based rate fluctuates with the market, which can be beneficial for borrowers when rates are falling. If SORA drops, so does your interest rate, potentially saving you money. However, this also means your rates could increase if SORA rises, leading to higher payments.

Advantages of SORA-based Rates:

Potential for Lower Costs. SORA-based loans can be cheaper than fixed-rate loans in a declining or low-interest-rate environment.

Flexibility. If the SORA rate decreases, so do your interest payments, which could lead to significant savings over the long term.

When is it better to choose a fixed rate over a SORA-based rate?

Choosing a fixed-rate home loan over a SORA-based interest rate is generally better in the following situations:

i. Expectation of Rising Interest Rates:

If the economic forecast suggests that interest rates are likely to rise, a fixed-rate loan locks in the current lower rates (for a specific period), saving you money over the loan term compared to a variable rate that could increase.

ii. Need for Budget Stability:

A fixed-rate mortgage is for you if having a predictable and consistent repayment amount is crucial for your financial planning and budgeting. It is essential for those with limited flexibility in their monthly budget.

iii. Long-term Loans:

For long-term financial commitments, such as mortgages, the stability of a fixed rate can be advantageous. The longer the term, the more significant the impact of rate fluctuations can be, making fixed rates a safer choice.

iv. Risk Aversion:

If you prefer to avoid the uncertainty and potential stress associated with fluctuating interest rates, a fixed rate provides that peace of mind.

v. Market Conditions:

In a low-interest-rate environment, locking in a fixed rate can be advantageous as it secures the low rate for two or three years at least, protecting against potential rate hikes.

Choosing a fixed rate over a SORA-based rate is particularly advantageous when stability, predictability, and protection against rising interest rates are top priorities. When deciding, it’s crucial to consider your financial situation and the broader economic context.

Q4. How does the Fed interest rate affect SORA and fixed-rate mortgages?

The relationship between the Federal Reserve’s interest rate (often referred to as the Fed rate) and Singapore’s financial instruments like SORA and fixed mortgages is indirect but influential.

The Fed rate is a critical driver of global financial markets. The Federal Reserve’s policies can significantly influence global economic trends, including investor behaviour, currency exchange rates, and international lending rates.

Mortgage rate predictions 2024 by the US Fed Reserve

The Fed Reserve hiked interest rates 11 times since March 2022, putting upward pressure on mortgage rates. The current rate of 5.25% to 5.50% is the highest in 22 years.

The effects rippled across the housing market, and mortgage rates rose in tandem with interest rate hikes. The 30-year interest rates briefly crossed the 8% mark in October 2023 but declined to around 7% as of December first-week – still at their highest level in over 20 years.

According to forecasts from industry experts, homebuyers may find relief from the high mortgage rates in 2024.

Although the Fed hasn’t reached its inflation target of 2%, the recent inflation data has some experts predicting that the Fed may be done with its aggressive rate-high campaign. As of 13 December, the Fed has paused rates over three consecutive meetings. The data showing easing inflation will motivate the Fed to reverse course further in 2024.

According to the FOMC members, the median projection of the federal funds rate would be 4.6% for the final quarter of 2024 (from 5.1% in September). That indicates the Fed expects three rate cuts next year by 75 basis points, or 0.75%, in 2024.

Impact on SORA:

Reduced Global Interest Rates: A reduction in the Fed’s interest rates may lead to lower interest rates globally. This trend can influence SORA, as it might lead to decreased interbank lending rates in Singapore.

International Capital Flows: Lower interest rates in the US can redirect global capital flows. Investors often seek markets offering higher returns, which could mean more investments in Asian markets, including Singapore. This influx of capital can affect the liquidity in the banking system, potentially impacting SORA.

Currency Exchange Rates: A cut in the Fed interest rates often leads to a weaker US dollar, which can affect the foreign exchange market. It might lead to adjustments in Singapore’s monetary policy, indirectly influencing SORA.

Impact on Fixed Rate Mortgages:

Fixed mortgages in Singapore might not be directly tied to the Fed rate, but international lenders who operate in Singapore might adjust their lending rates in response to changes in the Fed rate. It could influence the interest rates offered on fixed-rate mortgages.

Q5. How do current SORA-based rates compare with available fixed rates in 2024?

SORA Rates

Fixed Rates

Fixed-rate mortgages are currently more cost-effective than the calculated SORA rates when using the current SORA rate as a base. Borrowers might prefer fixed rates in this scenario, as they offer lower interest costs and more predictability over at least the first year or two compared to SORA rates.

However, the interest rate story can take a turn in 2024.

If industry experts anticipate a reduction in SORA rates in 2024, the interest on SORA-based floating rate loans would decrease accordingly, which may result in a lower total interest rate compared to fixed rates.

Borrowers with SORA-based interest rate loans would benefit from the rate decrease without having to refinance, which is an advantage over fixed-rate loans where the rate remains the same for the fixed lock-in period regardless of changes in market rates.

While the expectation of a rate cut might make SORA rates seem appealing, there is always a risk that the interest rates do not decrease as predicted or decrease less than expected. Borrowers must consider their risk tolerance for such uncertainties.

The fixed rates must be assessed for competitiveness against the potential lower SORA rates after the anticipated cuts. If the expected decrease in the SORA rate is significant, the floating rates could become more attractive than the current fixed rates.

Borrowers need to consider their long-term interest cost expectations. If the interest rate cut is expected to be temporary or may reverse after one or two rate cuts, fixed rates may offer better long-term stability. However, if the rate cut is expected to be sustained or followed by further cuts, SORA rates could be more economical over time.

Those who expect to pay off their mortgage or refinance in the short term might favour floating rates to take advantage of the expected rate cuts soon. In contrast, borrowers looking for cost certainty over a longer period might still prefer fixed rates, especially if they can lock in a rate that they find acceptable.

Conclusion

Choosing between SORA and fixed-rate loans in Singapore involves careful assessment of your financial situation, risk tolerance, and market projections. Each option has unique advantages and drawbacks, making it crucial to align your choice with your long-term financial goals and current economic trends.

Ask yourself whether the certainty of knowing how much you would be paying each month is important to you. If it is, then a fixed-rate loan might be more suitable because there would be no surprises. However, given that interest rates could fall in the next one to two years, borrowers might want to choose a shorter locked-in period for their home loan.

For others who believe that interest rates have peaked or that recessionary pressure is building up, getting a SORA-rate home loan may be more suitable. However, those who choose this option might want to set aside extra cash for a buffer in case interest rates rise instead.

Since most home loan packages come with a lock-in period of at least two years, make it a point to consider the potential penalty fees and conditions for refinancing or repricing before committing to a home loan package.

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