Reserve Bank proposals could force $2 billion mortgage hike: UBS

Swiss investment giant UBS has taken aim at the proposals in a highly critical note. It believes New Zealand borrowers could be hit with rate hikes due to the costs associated with the new proposals, which were first mooted by the central bank last month. UBS believes banks will pass on the cost to home loan customers.

UBS estimates Kiwis could have to pay up to $2.7 billion more on their home loans each year to fund the capital requirements. It believes the rules could see rates jump by 80-125 basis points.

RBNZ, led by governor Adrian Orr (pictured), wants banks to keep an extra 20% to 60% on their balance sheets to guard against risk in the financial system. The capital rules, if implemented, would be the highest bank capital ratios in the developed world, UBS says.

UBS says it disagrees with the RBNZ conclusion that proposals "will only have a minor impact on borrowing rates for customers". UBS analysts believe New Zealand banks will "need to reprice their NZ mortgage book by [about] 80 basis points to about 125 basis points" to achieve the same return on equity.

UBS is highly critical of the RBNZ proposals and believes they could be "unnecessary and potentially damaging" to the country's financial system.

The bank adds: "We believe the RBNZ's endeavours to strengthen the banks could come at a significant cost  to  the  NZ  economy  as  they  appear  to  be  materially  underestimating  the  likely  mortgage repricing."

UBS also predicts the RBNZ move will hit Australian investors in the pocket. The need to hold extra cash in New Zealand could force the Australian owners of the NZ big four to cut their dividend payments to shareholders, the investment bank said.

The investment bank says the RBNZ proposals would be the toughest in the world, surpassing Norway as the strictest in the developed world. 

The RBNZ proposals are a long way from being implemented. The central bank has launched a five year consultation period on the changes.