Interest Rate Swap Singapore

An interest rate swap is a derivative contract in which two parties exchange a fixed interest rate for a floating interest rate on the same notional amount and in the same currency, commonly used by Singapore companies and REITs to manage interest rate risk on SORA-linked loans.

Not financial advice. All figures for educational reference only. Data as at November 2026.

Last updated: November 2026

Key Takeaways

• An interest rate swap exchanges fixed for floating interest payments in a single currency, without any exchange of principal.
• Singapore’s benchmark floating rate is now the Singapore Overnight Rate Average (SORA), which replaced SOR in the market-wide transition completed by the end of 2024.
• Companies and S-REITs use interest rate swaps to convert floating SORA-linked loans into fixed payments, locking in borrowing costs and reducing earnings volatility.
• MAS requires licensed banks to report interest rate swap transactions under its OTC derivatives reporting framework, giving regulators visibility into market exposure.
• Unlike a cross currency swap, an interest rate swap involves only one currency and no exchange of principal, making it a simpler and generally cheaper hedge.

What Is an Interest Rate Swap?

An interest rate swap (IRS) is an OTC derivative in which one party agrees to pay a fixed interest rate on a notional principal amount, while the other pays a floating rate on the same notional, in the same currency, over an agreed period. No principal changes hands — only the net interest difference is settled periodically, typically quarterly or semi-annually. The notional amount exists purely as a reference figure for calculating interest; it is never exchanged.

Interest rate swaps are one of the most widely used derivatives globally because they let borrowers and lenders separate their view on interest rates from their underlying loan or investment. A company that has borrowed at a floating rate but wants budget certainty can swap into fixed without touching the original loan agreement with its bank.

How Does an Interest Rate Swap Work in Singapore?

Singapore completed its transition from the Singapore Dollar Swap Offer Rate (SOR) to the Singapore Overnight Rate Average (SORA) as the key interest rate benchmark, following the global shift away from LIBOR-style rates. Most new SGD floating-rate loans, bonds and interest rate swaps since then reference compounded SORA. The Steering Committee for SOR Transition to SORA (SC-STS), formed by MAS and the Association of Banks in Singapore, oversaw this shift, and by the end of the transition period essentially all new SGD derivatives used SORA.

Banks such as DBS, OCBC, UOB and major foreign banks with Singapore treasury desks quote SORA-based interest rate swaps to corporate and institutional clients. S-REITs, which typically carry substantial floating-rate bank debt to fund property acquisitions, are among the heaviest users of interest rate swaps in the Singapore market, often disclosing their percentage of debt hedged into fixed rates in their quarterly results as a key risk metric that analysts track.

It is also worth noting that interest rate swaps in Singapore are increasingly standardised around compounded SORA in arrears, rather than a forward-looking term rate, which means the exact floating payment is only known shortly before each settlement date rather than at the start of the period — a structural feature carried over from the broader global shift away from LIBOR-style benchmarks that Singapore borrowers and their banks have had to adapt their systems and loan documentation to handle. This arrears convention also means that budgeting for the floating leg of a swap, or for an unhedged SORA-linked loan, requires monitoring compounded SORA throughout the period rather than relying on a single rate fixed in advance, which is a meaningful operational difference from the old SOR-based system many Singapore treasurers were originally used to.

Interest Rate Swap Example

Consider a Singapore company with a S$20 million bank loan priced at compounded SORA + 1.0% per annum. If 3-month compounded SORA is currently around 2.8%, the company’s floating interest cost is roughly 3.8% per annum, but it is exposed to further SORA increases if market rates rise.

To remove this uncertainty, the company enters a 3-year interest rate swap with its bank: it agrees to pay a fixed rate of 3.5% per annum on the S$20 million notional, and receive compounded SORA + 1.0% from the bank in return. The SORA-linked receipts from the swap offset the SORA-linked payments on its underlying loan, leaving the company with a net fixed cost of 3.5% per annum for the next three years, regardless of where SORA moves.

Advantages of an Interest Rate Swap

• Budget certainty. Converting floating-rate debt into fixed payments protects a company’s interest expense from future SORA increases, which is especially valuable for REITs managing distributable income.
• No change to the underlying loan. The swap sits alongside the original bank facility, so there is no need to refinance or renegotiate loan covenants.
• Flexible notional and tenor. Swaps can be structured to exactly match a loan’s drawdown schedule and maturity, including amortising notionals for term loans.
• Liquid SGD swap market. SORA swaps are actively quoted by Singapore banks across standard tenors, making it straightforward to enter or exit a position relative to many other local-currency derivatives.

Risks and Limitations

• Opportunity cost if rates fall. A company that swaps into fixed will keep paying the fixed rate even if SORA subsequently falls, losing out relative to staying floating.
• Counterparty and basis risk. If the swap’s floating leg does not perfectly match the loan’s reset dates or compounding convention, a small basis mismatch can remain.
• Breakage costs on early termination. Unwinding a swap before maturity, for example after refinancing or selling the underlying asset, can trigger a mark-to-market breakage fee.
• Accounting complexity. Hedge accounting under SFRS(I) 9 requires documentation and effectiveness testing; without it, swap fair value changes flow directly through profit or loss, adding earnings volatility rather than reducing it.

Common Mistakes Singapore Investors Make

A common misunderstanding is assuming that a REIT or company with a high percentage of ‘fixed-rate’ debt via interest rate swaps is automatically safer than one with floating-rate debt. In reality, a swap locks in a cost, but if that fixed rate was set when SORA was elevated, the company could end up paying more than the market rate for years if SORA subsequently falls — a real opportunity cost that doesn’t show up as a headline risk the way floating-rate exposure does.

Another frequent error is treating ‘percentage of debt hedged’ disclosures as a single static figure rather than tracking how it changes over time. REITs often roll swaps as they mature, and a hedge ratio that looks conservative today can decline meaningfully within 12-18 months if new swaps aren’t put in place, re-exposing distributable income to SORA movements that investors may not notice until the next results announcement.

Interest Rate Swap vs Cross Currency Swap

Both are swap-type derivatives, but they solve different problems for Singapore borrowers.

Source: Association of Banks in Singapore (SC-STS) transition materials; bank treasury desk quotes, as at November 2026.

The Bottom Line

For Singapore corporates and REITs carrying SORA-linked floating-rate debt, an interest rate swap is the standard tool to lock in fixed borrowing costs without disturbing the underlying loan. It is simpler and generally cheaper than a cross currency swap because it involves only one currency and no exchange of principal, making it the first hedge most SGD borrowers reach for.

Frequently Asked Questions

Related Terms

• Cross Currency Swap Singapore
• Interest Rate Derivatives Singapore
• Total Return Swap Singapore
• Credit Spread Singapore