New mortgage registrations with banks have nosedived by a third while a $750,000 loan fixed for one year now costs about $160 more a week than it did a year ago.
Half the loans in New Zealand are fixed and due to roll over in the next 12 months and an economist says interest rate rises would divert money away from sectors such as retail and hospitality.
The Bankers Association of New Zealand and mortgage brokers spoken to by NZME said tough Credit Contracts and Consumer Finance Act (CCCFA) rules introduced in December had affected property lending the most.
After complaints from borrowers and the lending sector, the Government loosened some rules last month and is investigating further changes. But brokers say the rules are still having an impact.
Kiwibank senior manager for borrowing Richard McLay said up to the end of March, the number of new mortgages registered with banks was "down about a third across the market" compared with last year.
Its one-year rate for a home loan is 3.99 per cent pa with a minimum 20 per cent deposit.
Kiwibank's record lowest rate of 2.19 per cent fixed for one year was available in June-July last year.
Over a 25-year term on principal-and-interest repayments, weekly repayments would be $910 now versus $750 on the low rate.
McLay said the bank had support systems in place to protect customers and reduce the impact of rising interest rates.
This could be done through loan structures, splitting, or fixing for longer.
"When interest rates decreased in the past, we encouraged customers to keep their payments the same to build in a buffer against rates increasing back up."
The latest figures from the Reserve Bank of New Zealand reveal from December - when the tough credit rules kicked in - to February, lending to all borrower types with at least a 20 per cent deposit dropped to 17, 045 loans from 21,632 over the same timeframe a year ago.
The Mortgage Lab chief executive Rupert Gough said getting a yes from the banks on a home loan was harder.
"At the moment banks are still trawling through statements and declining people for overspending. That is the nitty-gritty of it ... people are a bit afraid of being declined."
The brokerage was fielding more inquiries from potential homeowners but he put that down to the fact "you can't really just go to the branch any more".
Ownit Mortgages Rotorua manager and registered financial adviser Hayley Hubbard said people were looking at houses - "but buying, not so much".
"I think the CCCFA has scared a lot of people as to whether or not they even want to inquire. I have noticed a lot of talk in the industry and from clients who want to hold off for three months and tidy up their accounts before they even try.
"And some of them are tidying up their accounts for no reason. They are like 'oh no I have Netflix, or I want to get rid of all these laybuys and stuff', which you don't necessarily need to do because you can condition for that."
Rapson Loans and Finance owner Chris Rapson said his view was that borrowing at 6 per cent or less put homeowners "ahead of the game because as the value of your property rises, so does your relative wealth".
He said getting some loans over the line had been a "nightmare".
"Very good people have been declined ... when I believed they should not have been."
A Bank of New Zealand spokesman said many people took advantage of low rates last year and some fixed for five years at 2.99 per cent.
Rates then were unusually depressed reflecting the heightened uncertainty around the economy due to the effects of Covid, he said.
Its rate fixed for one year was 3.99 per cent.
An ANZ spokeswoman said the relationship did not end once people had purchased a home and it encouraged concerned customers to contact the bank early.
She said ANZ had a one-year fixed-term special rate of 4.2 per cent.
Westpac's one-year fixed rate was 3.99 per cent and it was offering a $5000 cash gift for loans of $500,000 or more with a 20 per cent deposit.
New Zealand Bankers' Association chief executive Roger Beaumont said rising interest rates and the consumer lending rules changes had affected property lending.
"While we agree with the Government's aim to protect vulnerable consumers from predatory lenders, the new rules are affecting responsible lenders and their customers who could get loans before the rule change.
"The new rules have a one-size-fits-all approach for all lenders and all loan types and values, which has seriously impacted people applying for home loans. The new rules require banks to collect and verify much more information from customers, and the prescriptive approach means banks don't have the same discretion or flexibility they used to.
CoreLogic chief property economist Kelvin Davidson said pricing power in the property market was moving to buyers as houses were taking longer to sell.
"There are more listings and a mindset change, especially if buyers think the price is a bit high they will look at other properties instead."
He agreed lending was down and while the CCCFA had played a role, so had 20 per cent deposit requirements, which took longer for people to save.
About half the loans in New Zealand were fixed and due to roll over in the next 12 months so there was a big refinancing wave on its way, he said.
"If people are having to put more money towards their mortgage, petrol and food that means more general spending in retail and shops can't happen. There is a duty to keep pushing interest rates up to try and get inflation under control, but at the same time there will be pressure on the economy."
Last month Commerce and Consumer Affairs minister David Clark announced the Government was making practical amendments to the CCCFA, including clarifying that there was no need to "inquire into [borrowers'] current living expenses from recent bank transactions".
The Ministry of Business, Innovation and Employment said in a statement that, in light of concerns raised about changes to the CCCFA, its officials were also taking a closer look at the initial implementation, in consultation with other members of the Council of Financial Regulators.
The objective of the investigation was to identify any impacts and to assess what, if any, further actions were needed.