Mortgage rates could jump up by much more than what the Reserve Bank predicts under proposals to increase the level of capital banks hold, analysts are warning.
That would mean home-owners are paying thousands of dollars more each year in interest payments.
The Reserve Bank earlier this month revealed proposals to nearly double the amount of capital the banks have to have on standby over the next five years in a bid to make the banking system safer.
The central bank's consultation document points to a marginal cost increase for borrowers of around 50 basis points.
That could push up a two-year fixed term interest rate from the current average standard rate of 4.79 per cent to 5.29 per cent.
On a $300,000 mortgage fixed over two years on a 30-year term, it would increase the payments from $1572 per month to $1664.
But Macquarie analysts have predicted the rate rises could be as much as 90 to 140 basis points if the four major Australian-owned banks have to raise an additional A$18 billion (NZ$18.9 billion).
"The RBNZ paper suggests that the pricing response is likely to be immaterial.
"While, theoretically, this may be conceivable, in practice we believe it is highly unlikely.
"We estimate that banks' return on capital in NZ would decline by about 40 per cent, falling from about 17 per cent to about 10 per cent, suggesting that on average NZ returns would fall below the cost of equity.
"We estimate that banks would need to raise their pricing by about 90 to 140bps to offset the reduction in returns."
At the top end of that estimate, the monthly cost of a $300,000 mortgage could rise to $1835 - a jump of $263 a month or several thousand dollars a year.
"Given NZ is an importer of capital, the proposed changes would arguably increase the cost and availability of funding," the analysts say.
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Cameron Bagrie, an independent economist, said higher funding costs could see the Reserve Bank cut the official cash rate.
"If we have tighter conditions through the banks tightening credit that will allow the conventional channel - the OCR - to be lowered."
That could result in the New Zealand dollar falling, which would help exporters but make it more expensive for Kiwis to travel overseas.
The official cash rate is already at a record low of 1.75 per cent.
Last week, ANZ Bank economists picked the official cash rate would be cut next year on the back of a weakening global outlook and new bank capital rules.
"We are now forecasting a 25 basis point cut in the official cash rate in November 2019, with a further 50 basis points of cuts to come over 2020," ANZ chief economist Sharon Zollner said.
That was a big shift in outlook for the ANZ economists which had previously forecast rates to stay on hold into 2020.
It also puts them increasingly at odds with other bank economists most of whom are forecasting the next rate move will be up - after staying on hold into 2020.
Bagrie urged borrowers not to panic and said any increase in costs would be dependent on who would wear the cost of providing the capital - shareholders or bank customers.
He said there was plenty of room for the Australian-owned banks to retain their profits to boost their capital requirements.
"The New Zealand banking system is not just profitable - it is hellishly profitable."
He said the pre-tax return on equity for the sector was in excess of 20 per cent.
"They are a lot more profitable [here] than they are across the Tasman."
Bagrie also pointed to the other positive for consumers.
"The good news is that over time this will mitigate some of the potential for the boom and bust economic cycles New Zealand has seen in the past."
Bagrie said while the capital increases were well indicated, they were at the upper end of expectations.
"It was fully transparent. Everybody knew the work was under way. But it was not small numbers."
Consultation on the proposals closes on March 29 and the Reserve Bank is expected to make its final call in June on the changes.