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Banks moved within hours to slash home loan rates in the wake of the Reserve Bank cutting its official cash rate by a record 1.5 percentage points to 5 per cent.

State-owned Kiwibank said it was offering a one-year fixed rate of 6.49 per cent and a variable rate of 7.45 per cent.

Westpac cut its fixed mortgage rates with the two-year rate falling 50 basis points to 6.85 per cent and the five-year rate falling 45 basis points to 7.4 per cent. The Westpac one-year rate is 6.8 per cent.

The ANZ and The National Bank brands are offering six month, one-year and 18 month fixed rate mortgages at 6.99 per cent.

Many of the banks said they had already cut rates in anticipation of today's move so collectively the moves were large.

ANZ National, ASB, BNZ and Invercargill-based SBS Bank announced their cuts today.

In a clear message to lenders, Reserve Bank governor Alan Bollard said the Reserve Bank expected financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers.

The Reserve Bank acknowledged that recent falls in wholesale interest rates had resulted in "markedly" lower mortgage interest rates offered to new borrowers and households re-pricing existing debt.

Today's decision brings the cumulative reduction in the official cash rate since July to 3.25 percentage points.

However, banks have moved to tighten credit policies, making it harder for first time home owners to borrow money. ANZ National Bank and some other lenders are now requiring a 20 per cent deposit for most home purchases.

Kiwibank made significant cuts to its rates in late November in anticipation of the move by the Reserve Bank, chief executive Sam Knowles said.

"The decision by the Reserve Bank to make a cut of 1.5 per cent gives Kiwibank room to pass on further savings to those with home loans," he said.

"In the space of two weeks we have been able to bring down our variable rate from 8.70 per cent to 7.45 per cent. We have also brought the key short-end fixed rates below 7 per cent."

The bank has not been able to offer such low home loan rates for four years, he said.

ASB announced a drop in its variable home lending rate by 75 basis points, saying it had already cut 75 points in anticipation of the Reserve Bank's actions. Its new rate is 7.95 per cent. Other term rates remain the same.

SBS, the former Southland Building Society, dropped its floating rate mortgage 195 basis points to 7.20 per cent - a four-year low.

"SBS Bank is able to pass on the full benefits of the OCR reduction and more because we are not affected by the increased cost of borrowing offshore, which has been a result of the global credit crunch," said chief executive Ross Smith.

"In real terms, it means that householders on a floating rate with a 30-year, $300,000 loan will see about $315.00 carved off their monthly mortgage payments. Passing on the full reduction could potentially be a lifeline to some homeowners."

BNZ cut its floating mortgage rate to 7.75 per cent for mortgages with a 20 per cent deposit. Its six month rate drops to 6.49 per cent.

The ANZ and National Bank variable mortgage rate is now 8.2 per cent.