April 6, 2008

What is SIBOR

It stands for the Singapore Interbank Offered Rate

Where do you see this?

In bank statements explaining how your mortgage rates are determined.

What does it mean?

It refers, more or less, to repayments on your loans, because Sibor affects the mortgage rate.

Sibor is the rate at which banks lend to one another. When it falls, so do rates for variable or Sibor-linked mortgages. When the Sibor rises, you have to fork out more.

Sibor also gives a rough indication of where deposit and savings account rates at banks might be headed, as it is influenced partly by the supply and demand for funds in the Singapore interbank market.

When Sibor is low, it is cheaper for foreign banks, which have a smaller deposit base than local ones do, to borrow funds from the interbank market for their lending activities.

When this happens, the foreign banks are less likely to offer higher fixed deposit rates to attract Singaporeans to park cash with them.

But when liquidity in the market is tight and interbank rates rise, local banks will offer more attractive rates to convince Singapore savers not to switch to foreign rivals.

Why is it important?

Sibor is a key component used by banks in setting their home loan rates.

A blend of different interest rates - such as one-month, three-month and even 12-month Sibors - is typically used by banks to set fixed or variable rates for home loans.

The three-month Sibor is a common benchmark rate used by the banks to adjust their deposit rates. By monitoring it, you can get an indication of where banks are headed next with their fixed deposit and savings account rates.

Sibor is also used to set rates for so-called transparent mortgage packages offered by the three local banks as well as Standard Chartered, HSBC and Citibank.

These are linked directly to Sibor or another publicly disclosed rate, such as the Central Provident Fund (CPF) rate or the swap offered rate (SOR).

SOR is made up of Sibor plus a bank's lending costs, and is currently at about 1.39 per cent, down from 3 per cent a year ago.

In a falling interest rate environment, mortgage rates linked to Sibor or SOR will also trend downwards.

Sibor tends to track the United States Federal Reserve funds rate, which has been slashed in recent weeks to 2.25 per cent as the Fed attempts to stave off an economic recession in the US.

Sibor has plummeted from 2.94 per cent to 1.31 per cent over the past year, and economists say it might not have bottomed out yet.

Grace Ng