We model what determines mortgage interest rates in New Zealand, and examine how changes in the OCR are transmitted through the wholesale cost of funds (the swaps market in particular) to mortgage rates. Mortgage rates are modelled as a mark-up over banks’ marginal funding cost, which, in turn, is measured by rates on interest rate swaps, credit default swap (CDS) spreads for the major Australian banks (as a proxy for banks’ wholesale funding cost margin over swap rates), and term deposit rates.