The Reserve Bank of New Zealand (RBNZ) is poised to signal a more aggressive official cash rate (OCR) hike cycle in coming months, but mortgage borrowers are already bracing for a sharp rise in home loan rates—even before the first rate move. While the OCR remains on hold at 2.25% for now, wholesale borrowing costs have surged, squeezing bank margins and setting the stage for “pretty hefty rate rises” for fixed-term mortgages, according to industry analysts. The disconnect between wholesale rates and retail mortgage pricing has left experts warning that borrowers may soon face rates closer to 5.3% or higher—despite the RBNZ’s current pause.
Why Mortgage Rates Are Lagging Behind Wholesale Costs
New Zealand’s two-year fixed mortgage rates have climbed from a low of 4.5% late last year to around 5.2% today, but Koura Wealth founder Rupert Carlyon argues they remain “anywhere near high enough” given the spike in wholesale borrowing costs. Since early March, the two-year swap rate—a benchmark for bank funding—has jumped by 70 basis points, yet advertised mortgage rates have only inched up by about 20 basis points. “Swap rates have gone up by almost 100 basis points, 1 percent, over the last six months,” Carlyon said. “Mortgage rates have gone nowhere near that. So that means banks are wearing lower margins, which we also know New Zealand banks do not like to do for very long.”
The gap between wholesale and retail rates reflects a broader tension: banks have been slow to pass on rising funding costs, but Carlyon warns that margin pressure will soon force adjustments. “Even absent the OCR rises,” he said, “there would be some pretty hefty rate rises coming.”
Squirrel chief executive David Cunningham echoes this view, noting that when two-year fixed rates were at 4.5% in early 2025, the swap rate was just 2.6%. “At a 3.5% swap rate, that would imply a 5.4% two-year rate,” he said. “Most banks are around 5.2% or 5.3% now. So yes, there is a little upside.” Cunningham predicts rates will settle near 5.3% in the near term, though he acknowledges term deposit rates haven’t kept pace, which may temper some upward pressure on fixed lending.
Westpac’s May Rate Hikes Signal the Trend
Westpac’s latest mortgage rate adjustments—announced just days ago—offer a preview of what’s to come. The bank raised its three-year fixed terms by 6 basis points to 5.35% (special) and 5.95% (standard), while its one-year rate climbed to 4.79%, the highest among major banks for that term. The unchanged two-year rate remains competitive, matching BNZ’s lowest offer, but the broader trend is clear: rates are trending upward across the board.
While Westpac’s term deposit increases were modest—just 5 basis points for one-year terms—the message is unmistakable. “Where our fixed rates go from here will depend on a number of indirect moving parts,” Interest.co.nz noted. “Foreign influences are key, but local influences are still important.” The RBNZ’s latest data shows robust mortgage loan demand, even as the real estate market cools seasonally. With inflation still above the RBNZ’s 1-3% target band (CPI hit 3.1% in the March quarter), markets now assign a 40% chance of a 25-basis-point OCR hike as early as May 27—up from just 20% before the latest inflation data.
Yet the bigger story may be what happens after that. Analysts at BNZ suggest retail rates will continue climbing gradually, having already turned a corner late last year. “The short-term outlook for both wholesale and retail rates rests on what the Reserve Bank does and says,” BNZ’s chief economist Mike Jones said. “Particularly their guidance and forecasts for the rest of the year. That’s going to be worth tuning into.”
The RBNZ’s Dilemma: Inflation vs. Borrower Pain
The RBNZ faces a delicate balancing act. While higher rates could help tame inflation, they risk further straining households already grappling with elevated mortgage costs. The central bank’s current OCR of 2.25%—unchanged since November—has done little to curb price pressures, with CPI remaining stubbornly above target. Market pricing now suggests the OCR could reach 3.5% by mid-2027, a full percentage point higher than today’s level.
But the timing of the first hike remains uncertain. While Westpac’s rate moves and Carlyon’s warnings point to imminent adjustments, the RBNZ’s next OCR decision on May 27 is widely expected to keep rates on hold—though with a stronger signal toward future hikes. The challenge for policymakers is avoiding a scenario where mortgage rates spike too quickly, risking a sharp slowdown in housing activity at a time when demand already shows signs of weakening.
For borrowers, the message is clear: rates are on the rise, and waiting may not be the safest strategy. “Borrowers who ‘wait’ could well be facing higher repayments,” Interest.co.nz cautioned. With fixed rates now at or near their peak for this cycle, those locked into long-term deals may soon see their options narrow—and their costs climb.
What Comes Next: Three Scenarios for Borrowers
The path forward hinges on three key factors: the RBNZ’s next move, global financial conditions, and bank behavior.
- Scenario 1: RBNZ Signals Hikes, Rates Stabilize
The RBNZ holds rates in May but signals a more aggressive tightening path. Banks respond by raising fixed rates incrementally, keeping increases manageable. Borrowers with upcoming renewals may see modest bumps—perhaps another 20-30 basis points—but avoid a sharp shock.
- Scenario 2: Wholesale Costs Force Bank Hands
If swap rates continue climbing faster than the OCR, banks may act unilaterally to protect margins. Carlyon’s prediction of “pretty hefty rate rises” could come true, with two-year fixed rates jumping toward 5.4% or higher within weeks. This would put pressure on the RBNZ to act quickly to avoid a credit crunch.
- Scenario 3: Global Shocks Trigger a Reckoning
Geopolitical tensions or a sudden shift in global bond markets could send swap rates higher still, forcing banks to pass costs directly to borrowers. In this case, rates could spike abruptly, catching many off guard—especially those relying on short-term fixed deals.
For now, the safest bet for borrowers is to lock in rates as soon as possible—before the RBNZ’s next move or a wholesale market shock. With demand still strong and supply tightening, those who act quickly may secure better terms than those who wait. But the writing is on the wall: mortgage rates are about to get a lot less friendly.
Koura Wealth’s Rupert Carlyon warned that banks won’t tolerate thin margins for long. The question is no longer if rates will rise, but how fast. And for borrowers already stretched thin, the answer may arrive sooner than they expect.
