Banks are wearing compressed margins. Experts say that won't last much longer
New Zealand mortgage holders should brace for rate increases even before the Reserve Bank moves on the official cash rate, according to market commentators who say retail home loan rates have significantly lagged the sharp rise in wholesale swap markets over recent months, RNZ reported.
Two-year special rates have climbed from a trough of around 4.5% late last year to approximately 5.2% — but that movement has tracked well behind wholesale rate movements.
Since early March, the two-year swap rate has risen about 70 basis points while advertised two-year home loan rates have moved by only around 20 basis points, according to Koura Wealth founder Rupert Carlyon, who described current mortgage rates as not "anywhere near high enough" given where wholesale funding costs now sit.
"Swap rates have gone up by almost 100 basis points, 1%, over the last six months. Mortgage rates have gone nowhere near that. So that means that banks are wearing lower margins, which we also know the New Zealand banks do not like to do for very long," Carlyon said.
He warned that "pretty hefty rate rises" for mortgages were coming even without any OCR increases.
The Reserve Bank is widely expected to hold the OCR at 2.25% at Wednesday's Monetary Policy Statement — but with all four major banks forecasting OCR hikes in the second half of 2026, and all eight members of the NZIER Monetary Policy Shadow Board agreeing the OCR needs to be higher in 12 months' time, the question for borrowers is not if rates go higher, but when.
Where rates are heading — and why borrowers can't assume stability
Squirrel chief executive David Cunningham put more precise numbers around the gap. Cunningham noted that when two-year fixed rates were sitting at 4.5%, the swap rate was 2.6% — a margin of around 190 basis points. With the two-year swap now at 3.5%, that same margin would imply a two-year rate of approximately 5.4%. Most banks are currently sitting at 5.2–5.3%, suggesting limited but real further upside.
"At 3.5% swap rate that would imply a 5.4% two-year rate,” he said. “Most banks are around 5.2% or 5.3%. So yes, there is a little upside. That said, term investment and savings account rates aren't up so much, so that may contain fixed lending around their current level. I'd pick about 5.3 percent is where they will settle for now."
Not everyone sees the same degree of upside in fixed rates, however. BNZ chief economist Mike Jones agreed that upward pressure on retail rates was real but cautioned that volatile wholesale markets were making it difficult to read the trend clearly.
With the local one-year swap rate spiking to 3.28% before falling back to 3.15% within days, he said the short-term outlook would be heavily influenced by what the RBNZ signals on Wednesday. Jones noted that fixed mortgage rates may not have much further to rise this year if the market has already priced in three OCR hikes — meaning it is primarily floating rate borrowers who would feel additional increases should those hikes be delivered.
The message for mortgage advisers and their clients
Kiwibank chief economist Jarrod Kerr acknowledged that wholesale markets had moved beyond what most bank economists expected, with the market flirting with a cash rate of 3.25% by year end and pricing in around 3.6% a year from now. He described those market moves as somewhat exaggerated — but was clear on the direction for borrowers.
"I don't see mortgage rates falling. The obvious path is higher, not lower. That's the risk that households need to have in their minds," Kerr said.
He also noted a meaningful shift in borrower behaviour, with significantly more mortgage volume moving into two and even three-year fixed terms. The shift is visible in the data — more than 50% of new loans have recently been fixed for longer than 12 months, up sharply from around 20% in the September to November period last year, with the two-year term more popular than at any point since late 2022.
Kerr described this as borrowers making sensible decisions in light of the rate outlook, while acknowledging the reality that the entire mortgage rate curve is now materially higher than it was six months ago — a challenge for clients at any stage of the property journey, from first-home buyers assessing borrowing capacity to existing owners approaching refix dates.
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