Understanding the Lagging Effect of Compounded SORA and Why Repayment Changes Catch Many Off Guard
As interest rates go down around the world, Singapore’s mortgage market is changing again. Many homeowners are returning to SORA-linked mortgage packages.
The 1M/3M Compounded SORA (Singapore Overnight Rate Average) may seem appealing. However, it has details that borrowers should know. This includes the lag effect and how it impacts repayment timing.
Let’s break down the opportunities, risks, and what to expect as we head into late 2025 and 2026.
What Is a SORA-Linked Mortgage?
SORA-linked home loans are floating-rate mortgages tied to the 1-month or 3-month Compounded SORA published by MAS. SORA uses real overnight interbank rates instead of forward-looking benchmarks like SIBOR or board rates. These rates are averaged and compounded over the last 90 days.
Most banks structure their mortgage packages like this:
Home Loan Rate = 1M or 3M Compounded SORA + Bank Spread (e.g., 0.35%)
The Lagging Effect: Why Monthly Payments May Catch You Off Guard
Because 3-month SORA is backward-looking, it reflects rate movements that happened up to three months prior.
Example:
Let’s say 3-month SORA began falling steadily in April 2025 because of U.S. rate cuts.
You might expect your mortgage rate to drop by May or June, but in reality:
- Your July repayment might still reflect higher compounded SORA from earlier in the year.
- The impact of lower SORA will only appear in your mortgage around August or September.
This delay often surprises homeowners, especially those used to instant changes under SIBOR-linked or 1-month SORA packages.
Opportunities: Why Borrowers Still Favour SORA Packages in 2025
Despite the lag, SORA-linked mortgages remain highly popular, especially with interest rates trending down in 2H 2025.
Key Advantages:
- Transparency – SORA is published daily by MAS and not controlled by banks.
- Lower Cost of Borrowing – Effective rates (SORA + spread) are currently < 2.0%, lower than fixed-rate packages in many cases.
- No Arbitrary Repricing – Unlike board rates, market movements drive SORA changes, not internal bank decisions.
⚠️ Pitfalls to Watch For
Even with benefits, borrowers should be aware of these downsides:
1. Lag-Induced Misjudgment
Many assume falling interest rates = immediate monthly savings. However, due to the 3-month lag of the SORA, the drop takes time to reach your instalments.
2. Volatility Risk
If global inflation or policy changes go back to normal, SORA can rise again. Your repayments will also increase, but with a delay. No cap exists unless you have a rate cap feature.
3. Complexity for Budgeting
Unlike fixed loans, SORA-linked payments fluctuate every few months, which can complicate household cash flow planning.
Where Is SORA Headed in 2025–2026?
Trend (as of July 2025):
- 3M Compounded SORA has dropped to < 2.00%, from a peak of over 3.1% in mid-2024.
- Most analysts forecast it to remain stable or dip slightly further into 2026, depending on:
- U.S. Federal Reserve easing cycle
- MAS’s domestic monetary stance
- Inflationary pressures and capital inflow trends in Asia
📉 2026 Forecast Range: 1.63% – 2.10% for 3M SORA (if global soft landing continues)
Should You Refinance to SORA Now?
If you’re currently on:
- A fixed-rate loan above 3%, or
- A board rate loan with no transparency,
– Refinancing into a SORA-based home loan package with a low spread (≤0.5%) could reduce your total borrowing cost over the next 12–24 months.
Tip: Think about a SORA home loan with a free conversion option. This can protect you if interest rates go up, while you still enjoy current savings
Final Thoughts: Know the Rhythm Before You Dance to SORA
3-month SORA-linked home loans offer cost-saving potential, especially in a falling-rate environment. But they come with quirks—especially the 3-month lag that can distort repayment expectations. Alternatively, to consider a 1-month SORA-linked home loan instead of a 3-month SORA.
To make smart decisions:
- Ask your mortgage consultant about spread competitiveness and free conversion feature etc.
- Track SORA trends monthly
- Understand your lock-in and refinancing timelines
Pro Tip:
Always compare SORA home loan packages from different banks. Look at the headline spread, fees, lock-in periods, legal subsidy terms, or cash rebates. Consult IQrate today for a non-obligatory mortgage advisory.