Westpac raises fixed mortgage rates: are banks really quick to raise and slow to cut? The FMA's first public data reveals a more complex picture

“Rates rise like rockets and fall like feathers.”

Over the past few years, this has become a familiar verdict on banks among many New Zealand mortgage borrowers. Whenever the Reserve Bank of New Zealand raises the Official Cash Rate (OCR), lending rates seem to rise swiftly. When the OCR falls, however, banks are often accused of making slow and limited cuts.

Is this claim supported by the facts, or is it a market perception?

The Financial Markets Authority (FMA) recently published data for the first time on how eight major banks pass through OCR changes, providing the first official scorecard on this longstanding debate. Shortly after the release, Westpac announced increases to several fixed mortgage rates, drawing renewed market attention.

Taken together, official data and industry analysis show that reality is far more complex than the phrase “quick to raise, slow to cut” suggests.

The FMA releases its first scorecard, comparing the eight major banks side by side for the first time

The FMA's data covers eight major banks accounting for about 98% of the home loan market. It focuses on how banks adjust floating mortgage rates and on-call savings rates after OCR changes.

The purpose is clear: to increase transparency, help consumers compare the speed and size of different banks' adjustments, and make market competition more open.

The data shows that after the Reserve Bank of New Zealand raised the OCR by 25 basis points in July this year, the vast majority of banks passed the full 25 basis points on to floating mortgage borrowers.

Their responses on savings rates, however, differed markedly.

Kiwibank and TSB, for example, passed on almost the entire increase to on-call savings accounts, while ANZ, ASB and Westpac made significantly smaller adjustments.

In other words, borrowers and savers did not receive identical treatment following the same OCR increase.

The real surprise: banks did not follow the widely perceived pattern of

“raising rates faster and cutting them more slowly”

Beyond whether banks passed through the full OCR change, another set of figures was more surprising. Many people believe banks always raise rates faster than they cut them. The FMA's data shows the opposite.

Following the Reserve Bank of New Zealand's three consecutive rate cuts last year, banks took an average of about 14 days to adjust rates for existing floating mortgage borrowers. After the OCR increase in July this year, they took an average of about 20 days to implement their adjustments.

In terms of timing, then, the widely perceived pattern of faster increases and slower cuts did not occur.

The real difference lay in how much of the change was passed through.

During last year's successive OCR cuts, most banks did not pass the full reductions on to floating mortgage borrowers. On average, they passed through only about two-thirds to three-quarters, with substantial differences between banks.

For example, following an OCR cut in December last year, The Co-operative Bank reduced its floating mortgage rate by 31 basis points, while Westpac cut by only 20 basis points. This helps explain why the impression of banks being quick to raise and slow to cut stems more from the size of their adjustments than timing alone.

Why do banks respond so differently?

Industry observers say that while the OCR is an important determinant of lending rates, it is far from the only one.

Infometrics chief forecaster Gareth Kiernan says the OCR accounts for only part of banks' funding costs. They must also consider offshore funding costs, term deposit costs and their own funding mix, so they cannot mechanically follow every OCR change.

Simplicity economist Shamubeel Eaqub says that while public attention to the OCR matters, the fixed mortgage market deserves greater scrutiny in future.

He believes the margin between New Zealand's fixed mortgage rates and swap rates remains significantly higher than in Australia. Greater transparency is only the first step, and more data will be needed to monitor competition over time.

Why did Westpac move first to raise fixed mortgage rates?

Shortly after the FMA released its data, Westpac announced increases to its one-year, 18-month, two-year and three-year fixed mortgage rates.

Its standard two-year fixed mortgage rate rose to 6.05%, while its special rate increased to 5.45%, putting them above many competitors' rates.

Many borrowers may wonder: wasn't the OCR only just raised in early July? Why are fixed rates rising again now?

Westpac's explanation was not the OCR.

The bank said renewed tensions in the Middle East had driven a rapid rise in global funding costs, pushing up New Zealand swap rates and significantly increasing its offshore funding costs. It therefore had to adjust its fixed mortgage rates.

This illustrates that fixed mortgage rates are determined by more than the Reserve Bank of New Zealand's OCR.

Compared with floating mortgages, fixed mortgages are more influenced by international bond markets, swap rates and banks' overall funding costs.

In other words, even if the OCR remains unchanged, fixed mortgage rates could continue to move if international financial markets remain volatile.

The mortgage market enters a new phase of scrutiny

The FMA's first data release did not simply prove that banks are quick to raise rates and slow to cut them. It did, however, allow the public to compare banks' actual responses to OCR changes on a consistent basis for the first time.

For consumers, this transparency is itself a form of oversight. Which bank adjusts fastest, treats savers more favourably or passes through the largest changes will become clearer, potentially providing an important basis for choosing a bank.

Westpac's move to lead increases in fixed mortgage rates also highlights a new reality: mortgage costs are increasingly influenced by international financial markets, rather than solely by the Reserve Bank of New Zealand's OCR decisions every six weeks.

For New Zealand households preparing to buy a home, renew a loan or refix their mortgage, watching the OCR remains important. But changes in global funding costs, international developments and banks' funding costs also warrant attention, as all can directly affect monthly mortgage repayments over the coming years.

Do you think banks are sufficiently fair and transparent when adjusting interest rates? If you needed to refix your mortgage soon, would you lock in a rate now or keep waiting? Share your views in the comments.