Background
It has been almost a norm in various developed economies that for one to acquire a house, he or she must do it with the help of borrowings from financial institutions such as banks and mortgages. This has made mortgage companies take advantage of the situation to charge abnormal fees in some instances. This has led to many households having huge debts originating from mortgage loans. In addition, it has led to existence of tight relationship between mortgage industry and housing market. A solid evidence of this close relationship is evidenced by the past U.S subprime turmoil that led to global inflation, Todd (2001). So it is compelling to conclude that mortgage financing performs a pivotal role in the economy of any country and in their respective capital markets.
Focusing on Australia in the same context, statistics show that in the year 2011 the outstanding mortgage debt was at 1.2 trillion Australian dollars. Despite mortgage industry being vibrant in Australia as can be evidenced by this outstanding mortgage, no research has been conducted in the Australian context. Most of the existing literature on the same topic addresses the U.S situation. No research literature on mortgage fees exists in Australian context. It is this gap that has provoked the conducting of empirical research on mortgage fees in Australia. This means therefore that this research study will be the first to establish the various factors that influence the different elements of mortgage fees. The elements include total fee that is charged, origination fees and fees due to ongoing service. Of the three payments, origination and also ongoing service payments are usually extra payments met by borrowers. These payments have made Australian banks to make huge profits. Sources record that the banks made a whopping $ 11.1 billion in profits from these fees in 2011. A comparison done among countries such as Canada, U.S, New Zealand and the U.K found that the Australian mortgage market charges the highest rates. However, existing literature sites some of the challenges faced by researchers as difficulty involved in establishing whether the impact of fees on securitization is different from those on mortgages. This is according to Mishkin (2011).
The main objective of this research study will be to establish the main factors that affect mortgage rates in Australia.
Null hypothesis: The rate of inflation is the major determinant of mortgage rates in Australia.
Alternative hypothesis: The rate of inflation is not a major determinant of mortgage rates in Australia.
In order to support the main objective of this study, the research study had the following one primary research question and secondary questions;
Primary research question
Secondary research questions
This research study’s results will be of great importance as it will bridge the information gap that existed before as far as mortgage fees is concerned. It will provide lenders and borrowers with in-depth information that will enable them make informed decisions before taking or giving a mortgage. The researchers of this study believe that it will not be 100% exhausted. This will give room for other researchers to critique the paper and therefore provoking further research this one having formed a basis. This paper will also form part of an important academic resource materials among students studying economics not only in Australia but the world at large.
One of the major limitations to this research study will be time constraint. The study will entail a lot of work in terms of dispatching the questionnaires and having interviews with key respondents. The data will also have to be organized and analyzed to produce results. So in view of the scope of the study, time will be a limiting factor. The other challenge is the geographical area to be covered. Some of the companies are far flung hence will force the study to use more time and resources. The research is also bound to face hostility from some of the respondents as was evident during a pilot survey of the same study.
From the lenders perspective: More researchers have used lender data so as to determine the impact of securitization. This is because securitization had a direct impact on originator pricing. Ambrose and Conklin (2013) conducted a research and found that lower mortgage rates were common in companies that securitize loans.
A study conducted by Liu and Skully (2005) sought to find out the association between rates and the value of mortgage. They applied their study to the Hong Kong real estate market. Their study established that in deed there was a significant relationship in the positive direction between the interest rates and mortgage loans. This situation was even more significant in long term loans than in short term mortgage loans. A related study was conducted by La Cour – Little (2005) to try and correlate mortgage lending and flexible interest rates. The results of this research found that there was a negative relationship between mortgage financing and the rates charged. The research further reported that interests that are fixed would enable borrowers to be able to plan given that the repayment amount will be predictable. The net effect of this the research argues is the increased rate of borrowing.
Factors determining interest rates
According to Daniel (2010) there are a couple of factors that influence interest rates. They are;
This section of the research paper will entail all efforts to solve the problem of the research so as inferences can be drawn from the solution. In includes research design, sampling methods, population sample, data collection and analysis.
The research study will majorly follow a descriptive design. In a descriptive research design surveys forms the major part because it is through it that both qualitative and quantitative information is collected regarding a given research problem. Using the descriptive design, the study will be able to describe various aspects of mortgage fees such as its measures of central tendencies such as average fees, minimum and maximum mortgage fees prevailing in the Australian market and more importantly the deviations from the mean. Inferential statistics will also be employed so as to establish the relationship between mortgage rates and mortgage financing in the Australian mortgage market.
The population of the study in this research will be 40 registered commercial banks and mortgage corporations. The registration will be confirmed from the central bank of Australia. To add on, the data that will be used in this study will be from the period spanning 2010 to 2013. The study will pick this period as it is considered free from the effects of 2008 global financial crisis that affected various economies of the world. This period is also sufficient to be able to observe and be able to predict a trend. Due to limited time to conduct the study, the period from 2010 to 2013 was apt.
In selecting the sample population both non-probability sampling and probability sampling will be employed. The non-probability sampling that will be employed will be purposive sampling. Purposive sampling refers to a sampling method where a researcher is free to choose a sample that has the attributes that he or she requires for his or her study. Purposive sampling will be employed to select only those institutions that had been registered by the central bank of Australia. After having a pool of registered banks and mortgage corporations, simple random sampling or equal chance sampling will be used to select the 40 institutions to be used in the study. Both qualitative and quantitative research methods will be employed in the research study. In qualitative research method, sampled staff from the selected institutions will be engaged into focused group discussions where their opinions will be gathered and recorded. A one on one interview will also be conducted with the staff. The qualitative approach will enable the research study obtain a better description of the subject matter which would otherwise not be possible with quantitative approach. On the other hand, quantitative approach will also be used to obtain measurable variables that affect mortgage rates. The quantitative variables will enable the research study to conduct inferential statistics such as measures of associations, correlations and regressions.
The main research instruments that will be used to collect data will be questionnaires, focused group discussions and one-on-one interviews. Interviews and focused group discussions will majorly be used to collect qualitative data while questionnaires will be used to collect quantitative data.
This research study will heavily rely on past records or secondary data. This will be necessary as it will enable the study to be able to have a trend line to mortgage rates in Australia hence knowing mortgage behavior. The secondary sources will include financial reports from banks, statistical publications, reports from the central bank of Australia and economic journals. The information that will be gathered from the secondary sources will include market size and its growth for the past four years, data on major factors influencing mortgages and data on the rates of mortgages. To add on, primary data will also be collected. This primary data will be collected through the use of questionnaires. Questionnaires will be sent to key informants such as managers of selected banks and mortgage corporations for them to fill. Primary sources and to be specific the use of questionnaire is appropriate for this research as will be able to collect some information that might not be brought clearly by secondary data.
Since the data will both be qualitative and quantitative, the qualitative data will first be coded to ensure that it conforms with analysis tools such as excel and SPSS. This is to mean that the data will be analyzed using statistical software for social sciences (SPSS) and excel. Data will be summarized into tables and graphs so as to give a pictorial representation of the behavior of the variable, mortgage fees. Descriptive statistics such as measures of dispersion which include variance, standard deviation and range and measures of central tendencies such as mean, mode and median and distributions will also be established. Inferential statistics such as measures of associations, correlations, various tests such as t-tests and analysis of variance and regression analysis will also be performed.
The study will conduct test-retest reliability of the research instrument which is the questionnaire to establish its reliability. Cronbach’s Alpha test which is in the analysis software SPSS will be employed to establish the reliability of various questions in the questionnaire (a Cronbach Alpha value of 0.7 is always appropriate) (Kaplan & Saccuzz, 2003).
Ambrose, B. W., & Conklin, J. 2013. Mortgage brokers, origination fees, price transparency and competition.
Daniel, J. 2010. A fixed-rate loan prepayment model for Australian mortgages. Australian journal of management.
LaCour-Little, M. 2009. The pricing of mortgages by the brokers: An agency problem?,. Journal of real estate research.
Liu, B., & Skully , M. 2005. The determinants of mortgage yield spread differentials:. Journal of multinational financial management.
Mishkin, F. S. 2011. Over the cliff: From the subprime to the global financial crisis,. Journal of economic perspectives.
Todd , S. 2001. The effects of securitisation on consumer mortgage costs, Real Estate Economics.
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