If you’ve been keeping an eye on your mortgage or planning to refinance, you might have noticed something puzzling: the Reserve Bank of New Zealand has kept the Official Cash Rate (OCR) at 2.25%, yet many banks have been increasing their mortgage rates, particularly for longer-term fixed rates!
So what’s going on? If the OCR isn’t moving, why are mortgage rates climbing?
Understanding the OCR and Mortgage Rates Connection
First, it’s important to understand that the OCR and mortgage rates are related, but they don’t always move in sync. The OCR is the interest rate set by the Reserve Bank for overnight lending between banks—it’s essentially the “base price” of money in our banking system.
While floating rates typically follow OCR movements quite closely, fixed mortgage rates are influenced by banks’ expectations of where the OCR will be over the life of the loan, not just where it sits today. So if the banks think the OCR will rise, then the rates they provide will generally rise.
Key Reasons Mortgage Rates Are Rising
1. Wholesale Funding Costs Are Climbing
New Zealand banks don’t just fund mortgages from the OCR—they also borrow money from wholesale markets, (lenders that fund home loans through third-party brokers rather than directly to consumers) both domestically and internationally. These wholesale funding costs have been rising due to:
- Global interest rate pressures, particularly from major central banks overseas increasing their interest rates.
- Rising risk premiums amid international economic uncertainty. Political unrest, natural disasters and current events can all impact these premiums.
- Increased competition for funding in global markets. If all the banks are wanting to borrow from wholesale lenders, this increases demand, and the lenders increase their rates accordingly.
When it costs banks more to access funding, they pass some of those costs on to borrowers through higher mortgage rates.
2. Inflation Concerns Are Back
New Zealand’s inflation rate rose to 3.1% annually in the December 2025 quarter—above the Reserve Bank’s target range of 1-3%. This has caused speculation that:
- The Reserve Bank may need to raise the OCR sooner than expected to combat inflation
- Interest rates may stay higher for longer
- Our NZ economy might be heating up faster than anticipated
Banks price longer-term fixed rates based on where they think the OCR will be over the next 2-5 years, so if they expect rate hikes ahead, they’ll increase fixed rates now to protect their margins.
3. Market Expectations Have Shifted
Financial markets are now pricing in the possibility of OCR increases as early as mid-2026. Even though the Reserve Bank hasn’t raised rates yet, the expectation of future increases is enough to rates up.
This is why you might see 4-year and 5-year fixed rates rising more sharply than shorter-term rates—the longer the term, the more likely it is to capture a period of higher OCR settings.
4. Bank Margin Pressures
As hard as it is to believe, if you’re feeling like you money isn’t going as far these days, well banks feel it too sometimes!
With rising operational costs, increased regulatory requirements, and margin compression, they adjust their pricing strategies to maintain profitability, and some of these costs flow through to mortgage rates.
What This Means for You
If you’re currently on a floating rate or coming off a fixed term soon, here’s what you need to know:
For floating rate holders: You’re still benefiting from the low OCR, but you’re exposed to future rate increases. It might be worth considering locking in a portion of your loan at current fixed rates.
For those refixing: Shop around. Different banks have different funding costs and pricing strategies, and there can be significant variation in the rates on offer. This is where one of our Priority Home Loans mortgage advisers can help you navigate your options.
For first home buyers: Don’t panic. While rates are rising from recent lows, they’re still relatively affordable by historical standards. Focus on what you can afford comfortably, and consider fixing for a term that matches your financial goals and risk tolerance.
How We Can Help
Mortgage rates don’t just respond to what the OCR is doing today—they respond to expectations about where the OCR will go, changes in wholesale funding costs, and broader inflation and economic trends.
While the OCR sitting at 2.25% provides some stability, the reality is that banks must look ahead and price accordingly. That’s why we’re seeing mortgage rates inch upward even without an OCR change.
Our Priority Home Loans mortgage advisors will help you:
- Weigh up whether to refinance or refix.
- Provide insights on the market and trends we are seeing.
- Tell you what Bank specials are current and might work in your favour.
We are here to help you
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