Discuss about the Mortgage Fees in Australia.
An investigation was carried out to establish factors that affected the ongoing, originating fees and mortgages total fees in Australia. It was found out that, although the originating fees required was lower, mortgage corporations charge lower ongoing and total fees as compared to banks. It was also found out that fee echelons are dependent on the value loan ratio, the size of the loan and features of the loans like the presence of an offset account and loan term. The investigation further confirmed that lenders charged higher fee levels with lower interest rates or lower fee levels with higher interest rates. The investigation finally showed that Australia’s market conditions have an effect on the mortgage fees.
Housing property is one of the biggest domiciliary assets in most developed countries. This makes mortgages become the biggest household debt as people acquire housing property through borrowings. Such a situation creates a linkage between the housing and the capital markets, as evidently compelled by the Global Financial Crisis and the recent U.S subprime crisis. Therefore, mortgage finance plays a vital role in the economy and the capital market as well. In Australia, some unsettled mortgages amounted to about 1.2 trillion Australian dollars as of December 2011. Research done on the Australian fees for mortgages is very sporadic. Thus, authors got motivated to conduct an empirical study on this matter, testing the different factors affecting the several types of mortgage fees; origination fee, total fees together with the ongoing fees payable for service. The origination fees together with the ongoing service fee are usually paid as extra mortgage fees by borrowers. A survey shows that Australian lenders charge the highest fees when comparing the mortgage fees paid across Canada, New Zealand, the United States, Australia and the United Kingdom (Commission, 2008). This is also shown in a document written by the Securities and Investment Commission of Australia (2008, p.2). This paper, therefore, talks largely on the mortgage fees tendencies in Australia by looking at the various pertinent literatures that relates to the thinkable factors that have an impact on mortgage fees. The paper also discusses the methodology used by researches to obtain the data needed to support findings and conclusions on what drives mortgage fees in Australia. In this section, the data is described and variables used in regression representations defined. The findings are then established and discussed, and final conclusions made regarding what has been found out.
Factors such as the type of lenders, criteria used in lending, the latent sell out between mortgage fees and interest rates, conditions of the market, competition in the market and features of the loans are considered and looked upon. Type of lenders is categorized as either banks or non-banks. Researchers have often investigated effects securitization has on the behavior of originator pricing (Ambrose, B & Conklin, J, 2012). It was consistently found that lower mortgage rates are offered by mortgage firms whose loans are securitized, as compared to depository firms whose loans are retained majorly on their profit and loss accounts. This clearly shows that mortgage establishments are highly likely to charge lower mortgage fees than banks (Lui, B & Skully, M, 2008).
The effect criteria used in lending has on the fee charges has been minimally addressed in the literature, but researches that examine the effects of size of the loan and loan-to-value ratios on mortgage yield extents. It is rendered judicious to expect the three categories of fees charged to for use as interest rates in an analogous way by lenders in response to their dogmas acclaim (Todd 2016, p. 52). Origination fees are considered as interests that are prepaid (Newmark, R, De La Torre, C, & Stallings, M , 2008), and can be used in addressing certain risk types by lenders (Kau, J, & Keenan, C, 2015). Empirical and theoretical studies show that more points in exchange for lower interests that are fixed can be paid by borrowers as lenders offer trade-off concerning interest rates and points (Stone, C, & Zissu, M, 2015). This is per studies that focus on United States market, which is still unknown if interest rates and mortgage fees are relatable in Australia. This is tested empirically in this research.
About the conditions of the market, research proves that mortgage return extents are affected by the liquidity of the market (Black, D, Garbade, W, & Silber, W, 2014). This makes room for a prediction of a negative affiliation between mortgage fees and market liquidity. Literature also documents that the whole economy and international banking systems were largely affected by GFC (Lo 2012, p.1). This causes an expectation in the increase of the mortgage fees after the GFC (Mishkin, 2011).
Competition in the market is described in the configuration-enactment framework (Ambrose, B, LaCour-Little, M, & Sanders, B, 2013) or the markup theory. It is described that lower competition in the market leads to high-priced banking products. This raises the expectation of mortgage fees to be positively related to the degree of competition. Lastly, features of the loan are associated with how accumulative fees relate with this kind of loan features as both the loan term and offset account existence (McClatchey, C, & De La Torre, C, 2008). This allows payments about loan interests to be indicted adjacent to the interest that is earned by a particular account. This results to the borrower saving on tax. Furthermore, longer-term loans which have liquidity premiums have made it possible for the existence of an affirmative relationship between mortgage fees and life of the contract (Ambrose, B & Conklin, J, 2012). This also increases chances of lenders to have mortgage fee prepayments (Black, D, Garbade, W, & Silber, W, 2014).
With reputes about the offset account existence, there is a prospect that it would be consequent in greater mortgage fees. This is because the moneylender would require appended fees to reimburse for the added work necessary to order offset accounts. It is also presumable that borrowers who necessitate larger loans to capitalize on tax savings are usually the ones who benefit themselves on the offset account feature. Therefore, there would be involvement of higher mortgage fees.
Based on relevant literature provided and aims of the study, the effect on total, origination and ongoing fees due to variables like credit criteria, conditions of the market, interest rates, and competition of the market and features of the loan are tested. Variable was first defined and measured. Then a record of the proxies used for various variables was summarized. Secondly, empirical models are established. As stated previously, the impact on cumulative fees of each of these variables; type of lender, criteria of credit, characteristics of the loan, interest rates, market conditions and of the market competition is tested (Black, D, Garbade, W, & Silber, W, 2014).
The impact of this kind of variables is also tested together with the annexation of an added variable – the ongoing fees and the origination fees. In conclusion, the established variables are tested with the addition of variables like the ongoing fees and the impact they have on origination fees. Considering multi-collinear problems, the testing would not be done on one regression for each type of fees. Data was then established and put ready to be discussed and analyzed. The data established consisted of observations of customary modifiable rate mortgages about certain periods. This included most mortgage corporations and almost all commercial banks. After rerunning out of the loans without setting of loan terms, some of the observations made earlier remained. For example, mortgage organizations and commercial banks have a collective share of the mortgage market (Berger, A, & Hannan, T, 2013). Thus, the two groups satisfactorily represent the market in Australian. Data found allowed for examination of the effect of current market developments. The data collections included insignificant interest rates, the originators’ fees, standings, supreme loans and merchandise sorts, like an offset account as well as intense loan-to-value (LTV) ratios.
Other sets of data collected concerning mortgage securitization, and each type of lenders’ unpaid loans, either mortgage organizations, commercial banks, building civilizations or unions that offer credits and consumer price catalog are composed of the analytical databanks of the Australian Bureau of Statistics together with Reserve Bank of Australia. The greatest inhibition faced is that the data only covers a certain period. This is due to two reasons; data unavailability and lender identification. This makes it impossible to use information about the type of lender any given time.
Results of the research on the different types of fees were noted. Or the total fees, it was noted that the lender type significantly relates to total fees. On the ongoing fees, it was noted that there exists a consistency of the relationship between credit criteria methods and the ongoing fees with previous studies. Origination fees are negatively related to the lender. This suggests lower origination fees are offered by banks. Therefore, it seems that they focus less on origination fees and focus more on the ongoing fees. As a result, banks get to achieve lower origination fees and rather charge higher ongoing fees. Origination fees portray a negative relation towards the variable GFC in contrast to ongoing fees. This implies that lenders lower their origination fees during tight market conditions. They do so as an experiment to attract borrowers (Mishkin, 2011).
The presence of a high market share leads to a reduction in the originating fees. However, the degree through which lessening takes place is comparatively small, as correlated to the current hype in ongoing fees. This indicates that the upfront fees of leaders are reduced slightly when they increase. However, the fees they charge over loan life are bigger than this. Consequently, total fees increase. Therefore the purpose of the small reduction in the upfront fees is attracting of borrowers. A significant affiliation between origination fees and liquidity of the market is found. This relationship is a positive, in comparison to the ongoing fees and total fees. This indicates that moneylenders attempt to bring in borrowers in times when the market liquidity is low. This is facilitated through a reduction in origination fees, which is later recovered and made up through an increment in subsequent fees. In this case, lenders end up catering for all own fees in the long run.
Conclusion
The paperwork scrutinizes the main aspects that might have an effect on divergence in ongoing, origination fees and total fees of the Australian mortgage lenders. By the use of a data set that is large, the degree of fee diversifications across the two foremost kinds of lenders are examined. These diversifications may include criteria of credit lending and the loan impact on different levels of fees; and at the same time whether trade-off affiliation exists between mortgage fees and rates of interest. Further, investigations as to if the GFC, share of market, market liquidity of mortgages and GFC impact levels of fees were undertaken (Studenmund, 2016). A summary of the main findings aligning to each and every research questions postured in the Introduction was obtained. There were substantial variations in fee charges between mortgage firms and commercial banks. Relapse guesstimates suggest that mortgage companies require less total and ongoing fees compared to banks.
Results also approve that there is an existence of a negative coherence between nominal interest rates and the total fees, meaning that lenders who have higher interest rates would most likely be able to get lower fees (Woodward, S, & Hall, E, 2010). This finding has confirmed the consistency of literature with the expectation of the study. In conclusion, it was found out that, even though banks charge and expect a lower amount in origination fees, they charge a higher recurring fee in comparison with mortgage corporations. Another finding is that ongoing service fees together with the total fees cohere positively to maximum loans. This is not the case with origination fees, as they relate negatively with the following variables. It is also established that market liquidity has an adverse impact on the total fees together, while the GFC positively affects them. However, the two variables relate oppositely with the origination fees. Interest rates and total fees are inversely proportional especially when there is a trade-off relationship between them. Competition of the market also affects the fees, which are positively related to the market share, while the origination fees relate negatively.
All the above three forms of fees have a positive relationship to loan relations, as also seen, the literature that pacts with the affiliation between lender credit criteria and interest rates (LaCour-Littel, 2009). This paper encircles the current literature and presents relevant information about the credit criteria embraced, and the fees charged it is established that the dynamics in market conditions as portrayed market liquidity and the GFC affect fee levels. Through the study, one can significantly understand the impression of criteria used in credit determination, on origination fees, total fees, and ongoing fees, and the differences between total fees and amendable interest rates. It takes into consideration the market conditions that have taken place in the recent past in Australia and examines the variables involved. With this, a clear description of the impact of current developments in the market is taken into consideration.
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