SORA stands for Singapore Overnight Rate Average.  It’s an overnight interbank lending rate which is widely used to price Singapore mortgages since 2022, replacing its predecessor SIBOR (Singapore Interbank Offer Rate) which will be discontinued after 2024.

MAS actually provides a detailed documentation of SORA and how compounded SORA is derived, which it publishes on its website daily.

However, my guess is this 14-page documentation would be too daunting for the average homeowner to read through much less comprehend.  Hence, the purpose of this article to extract, interpret and present what we think are the key concepts of SORA, and what’s important to understand as a homeowner with a mortgage that’s pegged to compounded SORA. DBS home loans, OCBC home loans, UOB home loans, in fact almost all the mortgage lenders in Singapore, now pegged their mortgages to compounded 1-month or 3-month SORA including for commercial property loans.

Let us now look at how SORA works.

1. What Is SORA?

SORA is a volume-weighted overnight lending rate in the money market that market participants like financial institutions charge when they lend to one another.  If it is an overnight lending rate which means its value fluctuates daily, so you may wonder how then do you get a 1-month or 3-month SORA?

If we plot the actual SORA values (daily rates) where the earliest available data starts from Oct 2005 until Jun 2021 (we stop at this 16-year period as the conclusion will be the same even with extrapolation), you will see the volatility issue involved in using it as a loan peg:

Here, we use the value of daily or spot SORA on the 1^st calendar publication date of the month to plot the graph (daily SORA values for the day are published on the next business day, ie. the publication day). Imagine if your mortgage interest is pegged to actual spot SORA values, your interest rate can fluctuate greatly depending on which day in the month your interest rate is reset.

In order for SORA to be used as a loan peg, an average reading of SORA needs to be established.  According to MAS, instead of simply taking simple averages (adding up all the daily readings divided by no of days in the period), compounding average over a period better reflects the economic costs of borrowing overnight over a specified period.  It also better reflects time value of money more accurately.

Imagine if your mortgage interest is pegged to actual daily spot SORA values, your interest rate can fluctuate greatly depending on which day in the month your interest rate is reset.

2. How Do You Calculate Compounded SORA?

Compounded SORA for any period can be calculated using the formula given by MAS:

Fret not.  We are not about to launch into a mathematics session next to explain all the notations used (found in the MAS documentation for those who are keen).  Thankfully, the smart people at our central bank has figured out an easier way to do this via a SORA Index.  

First, the value of SORA on a starting point defined as the 1^st business day of 2020 (SORA value published on 3 Jan 2020) will be set to 1.0000000000 (up to 10 decimal places) as an index.  MAS then simply calculates how much is the “interest earned” on this index the following business day by compounding it daily.  Think of it like a bank deposit with daily rest where an interest rate of 1.50% (annualized) for example means your deposits grow by 0.0041% (1.50% divide 365 days) each day as it is compounded with interest added and recalculated daily.  In other words, you can take SORA Index like you deposit $1 on 3 January 2020 and watch how this grows over time with daily compounded interest except that this daily interest added is not constant but varies as it’s an overnight market rate.

With this SORA Index (base date 3 Jan 2020 where it equals 1) published daily, compounded interest can now be calculated easily by inputting the SORA Index value on the start and end date for any period like a rolling past 1-month, 3-month or 6-month, using the formula (extract from MAS documentation):

Still confused? I think the most important takeaway from this article is to at least understand the  meaning of compounded SORA for 1-month, 3-month and 6-month which is – the compounded average interest rate you “earn” from overnight interbank rates on a rolling past 30-day, 90-day or 180 days respectively (loosely speaking as there are some technical interpretations on business days in the MAS document).  Except here it’s not deposit rates you earn but lending rates which will be used to price your mortgages.  The concept of how it’s derived is similar though.

Compounded SORA for 1-month, 3-month and 6-month is the compounded average interest rate you “earn” from overnight interbank rates on a rolling past 30-day, 90-day or 180 days respectively.

MAS is the administrator for SORA, SORA Index and compounded SORA for 1-month, 3-month and 6-month, which collectively are referred to as SORA Averages.  It calculates and publishes on MAS website the full set of SORA Averages by around 9 a.m on the next business day. Also understand that in this blog we will simplify the terminology used for compounded SORA for ease of use. When we talk about 1-month SORA or 3-month SORA, we are actually referring to the 1-month compounded SORA or the 3-month compounded SORA respectively.

If all these sound too complicated and technical for the average homeowner, perhaps the most important takeaway you need to know is the difference between 1-month SORA versus 3-month SORA before deciding on packages. We get to that next.

3. Which Is Less Volatile: 1-month or 3-month SORA?

Using past data backdated from 2055 right up till 2022, we reconstructed the 1-month SORA (grey line) and examine its volatility against its 3-month cousin (orange line) below (The blue line represents the predecessor of 3-month SIBOR which is no longer in used):

The conclusion is what we’ve guessed. Compounding over a longer interval will smoothen out more of the inherent volatility of the underlying instrument. So, 3-month SORA is less volatile than 1-month SORA which in turn is less volatile than daily SORA readings. It then follows that 6-month SORA ought to be the least volatile amongst the three compounded SORA averages published by MAS. However, there may not be sufficient demand for banks to introduce mortgages pegged to 6-month SORA which will have the highest value by default.

What this means for homeowners is that in periods of interest rate escalation, the 3-month SORA would be preferred which acts like a temporary fixed rate with a lagging effect; and the reverse will be true where 1-month SORA would be preferred in periods of interest decline where you see your mortgage rate gets adjusted down quickly every month.

In summary, SORA has lived up to its expectation as a more robust replacement to SIBOR. Our reconstructed “historical SORA” also shows that it is less volatile than the old SIBOR. The use of backward-looking data makes it less susceptible to market inefficiencies or manipulations (forward-looking rates are more exposed to market factors on a single day’s fixing, such as quarter or year-end volatility) as the underlying overnight unsecured market is the most actively traded SGF funding market. In other words, SORA is a more robust interest rate benchmark over the long term.

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