Home loan interest rates set to rise off bank capital increase

Home loan borrowers could see high rates as the capital increase flows through the banks. Photo/file.

Home loan rates could rise by 30 to 60 basis points in response to an increase in the amount of capital banks will have to hold, according to economists at the country's largest bank.

After a year-long consultation, the Reserve Bank revealed its final decisions today in a move that will require the major banks to find an extra $20 billion over seven years.

Starting from mid-2020, the banks which dominate the sector will have to increase their total capital to 18 per cent, from a minimum of 10.5 per cent now.

Typically, banks carry a buffer above the minimum of at least an additional 2 percentage points.

Smaller banks, including the likes of Kiwibank, TSB, Cooperative and SBS will need to have total capital of 16 per cent, up from what they hold now but below December's proposal.

Larger banks need to hold more capital than their smaller rivals because if one were to fail it could have a severe impact on the economy.

The RBNZ has estimated the impact from the changes on home loan rates would be a 20 basis-point rise.

But in a note, ANZ chief economist Sharon Zollner said it expected a larger impact on both retail interest rates and credit availability and consequently more of a negative impact on GDP - gross domestic product.

"A back-of-the-envelope update of our previous modelling of the impact of the RBNZ's proposed changes suggests a 30-60 basis-point impact on the cost of credit."

She said this was less than it had previously estimated due to a softening in the definition of eligible capital but warned that the impacts were uncertain.

"There are risks of effects towards the higher end of this range and/or a reduction in the availability of credit, particularly to agricultural and business sectors (reflecting the higher capital required for lending to these sectors)."

Home loan rates have fallen to record lows this year. Interest.co.nz shows borrowers can get a rate of around 3.45 per cent for a two-year fixed mortgage at the main trading banks.

A 60-basis-point rise would push that back over 4 per cent to 4.05 per cent. On a $300k mortgage that would increase the monthly payments from $1494 to $1592 - a $98 rise - over a 25-year term.

Westpac senior economist Michael Gordon said it was factoring in a 40-basis-point rise to interest rates off today's announcement, which was down on its earlier prediction.

"We had estimated that the initial proposal would cause a 50-basis-point widening in the margin between bank lending rates and deposit rates by the end of the phase-in period, and a 1 per cent reduction in the long-run level of GDP.

"However, we had anticipated some softening of the proposal, and factored a 40-basis-point margin widening into our forecasts. Today's decisions appear to be in line with what we assumed."

Gordon said he didn't anticipate any changes to the Reserve Bank's monetary policy as a result of the capital changes.

Zollner said overall it expected an impact on GDP, which could be as much as 1 per cent if credit was squeezed compared to Reserve Bank estimates of 0.2 per cent.

But any impacts would be over the long transition period and difficult to identify. Banks have seven years to meet the new capital requirements.

However, Zollner said the increased capital requirements contributed to its view that growth would be slower than the RBNZ expected and would result in the official cash rate needing to be cut again.

The OCR is already at a record low of 1 per cent. ANZ is picking it will be cut by another 25 basis points to 0.75 per cent in May.

"Risks to this outlook appear balanced and context matters: with the OCR at just 1 per cent, the RBNZ's ability to offset the impact of the capital changes is limited, so if impacts are greater than the RBNZ expects, fire-power will diminish quickly, increasing the probability that unconventional measures are required.

"This would especially be the case if the economy was hit by any kind of negative shock over the transition period. But for now, the economic outlook appears to be brightening as the impact of previous monetary easing works through."