KEY POINTS:
The suggestion of a mortgage rate levy reflects frustration that the Reserve Bank's only weapon against inflation, raising the official cash rate, seems to work only slowly.
Interest rate hikes push up the exchange rate, hammering the export sector. And they bite on business borrowers.
But, in the household sector, people have shrugged them off and kept borrowing.
One reason is the switch from floating to fixed-rate mortgages.
In the past, when most mortgages were on floating rates that respond immediately to official cash rate changes, it was easy for the Governor of the Reserve Bank to drain spending power out of the household sector, or put it back.
But now 83 per cent of mortgage debt is at fixed rates, which delays and dilutes the impact of such changes.
The mortgage levy idea exists in more than one version but it is essentially a tax to push up the cost of borrowing when it is thought desirable to do so.
The version that Treasury and Reserve Bank officials looked at early last year, but did not support, would apply to all mortgages, not just fixed rate ones.
While in place it would widen the gap between the interest rate borrowers pay and the rate the savers who fund the loans receive. About a third of money banks lend comes from overseas savers, whose yen and euros and so on have first to be swapped for NZ dollars, which pushes up the exchange rate.
The idea would be to make home loans more costly to borrowers here without at the same time making funding those loans more attractive to overseas savers.
Another version of the idea, promoted by BNZ chief economist Tony Alexander, would only apply to fixed-rate loans, in effect turning them into floating rate loans from the borrower's standpoint.
If it had the power to raise and lower a levy on fixed-rate mortgages over and above the interest going to the bank making the loan, the Reserve Bank would have the bulk of mortgage debt back within its reach, making monetary policy work faster.
Interest rates would then not have to be as high for as long, lessening the amount of short-term "speculative" money that flows to the country to take advantage of higher rates and pushes up the exchange rate in the process.
Mr Alexander said it would be unequivocally bad for borrowers because it would in effect legislate fixed rate loans out of existence.
But it would be good for exports, an area in which the economy has performed poorly for decades.
Critics say it will make first homes even less affordable.
And it would not take long to find ways around it. Westpac chief economist Brendan O'Donovan said banks could vary other elements of the loan to offset the levy.
