Home loan borrowers start to feel the initial impact of a hike or fall in official interest rates within a month but the biggest impact on mortgage rates takes about six months to kick in.
Reserve Bank of New Zealand research shows that a one percent change in the official cash rate typically moves average two-year mortgage rates by 0.34 percent within one month.
”The pass-through from changes in monetary policy increases over time, with the peak impact on mortgage rates about six months after a change in the official cash rate."
“However, a rise or fall in the OCR does not change all mortgage rates to the same extent.
Typically, moves in the official cash rate will have the biggest impact on shorter mortgage terms, for example, terms of a year or less.
"Individual borrowers with mortgages on longer fixed terms may take months or years to roll off, delaying the impact on their monthly repayments," the report said.
The research also found evidence that some banks pass on more of the change in official interest rates than others.
For instance, banks that rely less on deposits from local retail investors seem to have a stronger and faster pass-through than others, the paper said.
Alternatively, small banks also seem to pass on changes in the rate more than large banks, the RBA noted.
Home loans make up around 43 percent of commercial bank balance sheets, a large part of all borrowing in New Zealand.
In August, the RBNZ left the official cash rate at 0.25 percent after a sudden Covid lockdown forced it to change course and delay normalising policy settings.
The central bank was careful to point out that the research does not account for potential changes in the terms borrowers choose. For example, if rates are low or falling, borrowers may borrow for shorter terms, the report said. "If rates are high or rising, they may fix for longer terms."