Whether it is fixed rate or floating rate, a commercial loan borrower’s specific needs determines which is best loan for them.
In Singapore, commercial loans can take the form of either fixed or floating rate loans. A fixed rate loan is a loan where the interest rate is set at a certain level for the duration of the loan, while a floating rate loan is a loan where the interest rate can fluctuate based on market conditions.
Both types of loans have their own advantages and disadvantages, and the choice between them will depend on the commercial loan borrower’s specific needs.
One major advantage of a fixed rate loan is that it provides the borrower with a sense of predictability when it comes to their loan payments. Because the interest rate remains constant, the borrower knows exactly what their monthly payments will be and can budget accordingly. This can be especially beneficial for borrowers who are planning to use the loan to finance a long-term project or purchase, as they can be confident that their loan payments will not change unexpectedly.
On the other hand, a floating rate loan can be more advantageous for borrowers who expect interest rates to decrease. As interest rates fall, the monthly payments on a floating rate loan will also fall, which can lead to significant savings over the life of the loan. Additionally, floating rate loans are often linked to a benchmark interest rate, such as SIBOR (Singapore Interbank Offered Rate), which can provide added transparency and fairness for borrowers in the market.
Another advantage of floating rate loans is that they can be more flexible than fixed rate loans. Many floating rate loans come with the option to convert to a fixed rate loan at a later date, which can provide the borrower with the best of both worlds: the predictability of a fixed rate loan in the short-term and the potential savings of a floating rate loan in the long-term.
In Singapore, there are other features that can be attached to commercial loans such as early settlement penalties, grace period for interest only payments, repayments in foreign currency, different types of collateral etc.
For commercial loan borrower’s specific needs, it’s advisable to consult with financial advisor or loan officer for more detailed information.
In Singapore, SIBOR is widely used as benchmark rate for floating rate loans in SGD, some commercial loans also use SOR (Swap Offer Rate) for benchmark. The SOR rate is generally higher than the SIBOR rate due to the fact that it represents the rate at which banks can borrow or lend SGD on the swap market, it might be slightly different based on the tenor (for example 1 month or 3 months).
More recently, the Singapore Overnight Rate Average (SORA) has been adopted as the new benchmark interest rate. It was introduced in Singapore as a replacement for the Singapore Interbank Offered Rate (SIBOR). The SIBOR is a benchmark interest rate that is used as a reference for pricing financial products, such as loans and derivatives, in Singapore. The SORA, on the other hand, is based on actual transactions in the Singapore Overnight Rate market, making it a more transparent and reliable benchmark.
One of the main reasons for the replacement of SIBOR with SORA is the increased scrutiny of global benchmark rates following the financial crisis of 2008. The SIBOR, like many other benchmark rates, is based on a survey of banks, which makes it susceptible to manipulation. In contrast, the SORA is based on actual transactions in the overnight rate market, making it less susceptible to manipulation. Additionally, SORA is administrated by the Monetary Authority of Singapore, which provides more oversight and transparency.
Another advantage of SORA is that it is based on actual transactions in the overnight market, which are more representative of the true cost of borrowing in Singapore. The SIBOR, on the other hand, is based on a survey of banks, which may not accurately reflect the true cost of borrowing in Singapore. The SORA is also more closely aligned with monetary policy, as it is influenced by the operations of the central bank.
However, the transition to SORA is not without its challenges. For example, there are a large number of financial products that are currently priced based on SIBOR, and the transition to SORA will require these products to be repriced, which may be complex and time-consuming. Additionally, the SORA is currently not as widely used as the SIBOR, which may lead to a lack of liquidity in the SORA market.
The replacement of SIBOR with SORA is a significant development in Singapore’s financial market. SORA is a more transparent and reliable benchmark rate, based on actual transactions in the overnight market, and it is closely aligned with monetary policy. However, the transition to SORA will require a significant effort, and the lack of liquidity in the SORA market may be a challenge. It will be important for Singapore’s financial market to closely monitor the progress of the transition to SORA and take steps to ensure a smooth transition.
It is also worth noting that this transition has also been motivated by the global move from Libor, however SORA has been adopted with multiple tenors, making it more versatile benchmark rate.
But regardless of SORA or SIBOR, there is also a downside to floating rate loans. As interest rates rise, the monthly payments on a floating rate loan will also rise, which can be a disadvantage for borrowers who are already stretched thin financially.
Additionally, borrowers may be exposed to higher interest rate risk, and as interest rates fluctuate, it will be harder to budget, calculate the future returns and make decision accordingly. Commercial loan borrower’s specific needs therefore is paramount as to which loan type is best suited for them.
Overall, the choice between a fixed rate loan and a floating rate loan will depend on the specific needs of the borrower. Borrowers who value predictability and stability may prefer a fixed rate loan, while borrowers who expect interest rates to decrease or are willing to take on more interest rate risk may prefer a floating rate loan. It is important for borrowers to carefully consider their options and speak with a loan officer or financial advisor to determine which type of loan is best for their situation.
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