The Australian Mortgage Market
Funding and Buying a House
In Australia, the process to fund the purchase of a house has been relatively consistent and much the same since the 1980s. Individuals buy a house by borrowing from a bank that uses deposits, wholesale debt, and equity to loan the funds. The borrower uses the house as collateral for the loan and creates a mortgage in favour of the bank.
The borrower uses mortgage loan proceeds, together with their own monies to pay the seller for the house. The seller deposits the proceeds in a bank and the cycle can then continue for other borrowers to fund house purchases.
In Australia, banks are regulated by the Australian Prudential Regulatory Authority (APRA) and the government, subject to some limitations, guarantees bank deposits. APRA requires banks to hold set levels of capital against each loan to protect the depositors and the government against the loan not being repaid. The lending bank can also take out mortgage insurance that insures it against losses on a loan if the loan is not repaid.
Regulation, capital levels and mortgage insurance add to the cost of administering the mortgage to the lender, which is passed onto the borrower.
Mortgage Book Risk Management
Banks build mortgage loan portfolios that are funded by deposits, wholesale debt and capital. These loans are owned by the bank and therefore are on its balance sheet.
APRA seeks to protect the interests of depositors, wholesale investors and the government and imposes minimum capital requirements and standards for risk management systems for the portfolio of mortgage loans.
Banks can also fund mortgages through securitisation, where residential mortgage-backed securities (RMBS) are sold to institutional investors. Within the standards of issuing RMBS, there are requirements for transparency and analysis of the underlying risk and value of the mortgage collateral.
Mòrgij Analytics, through its MARQ platform provides:
- Risk management systems to meet the regulatory requirements for mortgage loans
- Highly efficient, low cost solutions to APRA’s regulatory requirements for banks
- Analytic risk and value requirements of the debt capital markets