Analysing interest rate mark-ups in the Australian mortgage market

The aim of this paper is to enhance transparency and competition in Australia's mortgage market by examining the behaviour of the mortgage interest rate spread of 39 individual lenders. Using a time-varying probability regime-switching model and monthly data (2000M9-2012M3), we identify two very distinctive regimes: a low mark-up regime (R-1) and a high mark-up regime (R-2). Without setting any given date a priori, the results from both the regime-switching approach and a sequential search method indicate that the spread exhibits a significant upward shift around early 2008 for all lenders. The estimated switching model controls for the rising wholesale funding costs and changes in global consumer confidence over the sample period. The results show that building societies are generally less inclined to remain in R2 than most banks (particularly foreign subsidiary banks) and some credit unions, and are consequently more likely to offer competitive mortgages to borrowers. (C) 2014 Elsevier B.V. All rights reserved.