What Determine Mortgage Yield Spreads in Australia? Credit Criteria, Funding Channels and the Market Condition

This paper empirically examines key factors that may affect mortgage yield spreads of banks and mortgage corporations in Australia, and analyses changes of lender credit policy. Literature and the recent sub-prime crisis suggest that three key factor (lender criteria, funding channel and housing price) are relevant to yield spreads. Using a large unique dataset, this paper is the first to examine these three variables together and relaxation of lender credit criteria. Regression findings suggest that credit criteria, funding channels and housing price changes are significantly associated with yield spreads. The analysis also indicates that lenders considerably relaxed their credit policy for the research period. The findings are consistent with the literature related to each variable and add new evidence to existing research