lady shocked by rising SORA home loan rates

Don’t Be Spoofed By SORA!

Or rather, don’t be spoofed by the low headline-grabbing rates on floating SORA home loans right now!  I get worried when I read comments by brokers who talked about how homeowners could still “reap interest savings from a lower SORA-pegged home loan rate”, as opposed to fixed rates.

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We understand that many are attracted to the 1% SORA home loan rate in the first two years, especially when stacked against 2-year fixed rates today which are mostly at 2.25%.  There’s still a certain naivety amongst homeowners who tend to grab whatever is the lowest-dangling headline number without first understanding the workings of SORA.  Mortgage consultants, however, ought to do better.  And, as thought leader in the mortgage space, we have a duty to make sure homeowners are given the correct information before they make decision between going for fixed rate or floating rate.

Compounded SORA for 1-month and 3-month are simply averaging methodology over the past 1-month and 3-month respectively on the underlying SORA which is a daily overnight lending rate.  This overnight rate is highly volatile with wild swings both directions up and there which is why there’s a need to average it before it can be used as an index for pricing mortgages.  Still, being the underlying peg, its current level and trending does provide an indication of where 1-month and 3-month SORA will eventually get to in the next few months.  To put it another way, if the underlying peg is going up over time, the “averages” on this underlying peg will definitely move up over time with the 1-month compounded SORA being more elastic (more responsive to the increases) than the 3-month.

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And what’s the latest reading on this overnight lending rate?  As of 17 May (Mon), daily SORA has swung up to 1.37% following the latest Fed hike!  As explained, it will swing wildly on a daily basis like 0.70% on one day and suddenly 1.50% on the next.  However, with U.S. Fed poised to make two more 0.50% moves in June and July, its general trend line over the next few months is definitely upwards, ignoring the swings.  And steeply upwards. Remember this is the fastest tightening cycle on record for U.S. Fed – if they follow through with the planned 150 basis points front-loading of rate hikes by July. What this means is that 3-month SORA, which compounds backwards on this daily SORA over the next few months, will eventually get to 1.00%, most likely higher, in three months’ time – exactly when your new loan kicks in.

So, with an average year one spread (the mark-up above SORA peg) of 0.80%, what’s the final home loan rate which you’ll be paying when your new loan starts in August?  Close to 2%, maybe even higher, is my guess.  If I tell you that, how does that affect your choice between fixed or floating rate home loan?

Mortgage brokers who want you to refinance out so there’s business to do will not tell you that.  Certainly, bankers who have no other lower fixed rate home loans to offer you will not tell you that.

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Before you walk away thinking we are advocating only fixed rates here, let me put this in context.  Yes, we’d been recommending fixed rate home loans since the end of 2021 when we detected Fed pivoting to hawkish stance to combat inflation.  Following Fed hikes this year, treasury yields have risen fast leading to fixed rates escalating at such a furious pace many has been caught out.  This will soon be followed by rising floating rates especially SORA which has a “laggard effect” due to its backward compounding methodology.  When fixed rates escalate beyond a certain point, it warrants taking a bet on floating rate instead as the risks of over-commitment on a high fixed rate rises.  Deciding on where is that point is an art.

In fact, when all fixed rates go above 2% soon, we ourselves might be taking a necessary pause in our day-to-day operations as it becomes extremely difficult to calibrate this and to give the right advice to our clients. We will need some time to ponder this and observe the market.

In summary, we are not saying choosing fixed rate is the right option now.  However, it is important for homeowners to understand the workings of SORA and its laggard effect before making an informed decision.  For that, we started to show the daily SORA value on our home page every Monday (first work day) of the week.  With its wild swings it’s a crude measure, but at the very least, it does give an indication of how high compounded SORA values will get to in three months’ time.

So, with an average year one spread (mark-up above SORA) of 0.80%, what’s the final home loan rate which you’ll be paying when your new loan starts in August?  Close to 2%, maybe even higher, is my guess.  If I tell you that, how does that affect your choice between fixed or floating rate home loan?

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