The Good

If you are sitting on a floating or variable mortgage rate at the moment the good news is your loan is about to get cheaper.

When the official cash rate falls floating rates typically follow it downwards.

That's because floating rates are linked to the cash rate.


Banks usually make an announcement on the same day or within a day or two of the rate cut if they are going to lower their floating or variable rate.

Reserve Bank cuts Official Cash Rate to record low - ANZ cuts

The actual cut usually takes two weeks to come into effect for an existing mortgage. New customers get the lower rate sooner.

Floating rates are currently around 6 per cent so even with a cut of 0.25 basis points they are likely to remain higher than most fixed term rates.

But they offer the advantage of being able to make extra repayments without penalties.

Mortgage broker Christine Lockie of LoanPlan said it was only a good idea to have a large amount of debt on a floating rate if people were expecting to get a lump sum of money.

Some people have part of their mortgage on a floating rate and part on a fixed rate allowing them to make extra repayments without paying extra fees.

The Bad


The bad news is if you are on a fixed rate home loan you won't see any change to that rate from a shift in the official cash rate.

That's because fixed loans are based around how much a bank pays to borrow money on the international market not the official cash rate.

Fixed term rates have fallen in the last year to record lows.

It's commonplace to get a rate under 5 per cent for one or two years fixed.

SBS Bank recently dropped its rate to offer 3.99 per cent for one year.

But Lockie said most of the other banks were not prepared to match that rate.

One way to get a lower rate is to break your current fixed term and either switch to another bank or stay with your current bank at a lower rate but....

The Ugly

When the official cash rate falls the cost of breaking the fixed term on a mortgage also increases so if you are planning to make a break for a cheaper fixed term you might want to think again.

It pays to ask your bank how much it will cost to break a mortgage and weigh this up against the potential savings before making any decisions.

There is some expectation that fixed rates are as low as they are going to go and therefore people should lock in their money for as long as possible.

But Lockie said there was no way of knowing for sure where rates were headed.

A year ago many people believed rates were likely to head upwards prompting them to lock in rates that now look expensive compared to those currently available.

Lockie said she did not recommend people fixing beyond three years as it was difficult for people to see beyond that timeframe.

For those who fixed and moved homes the mortgage rate could be taken with them if the sale and purchase happened at the same time, she said.

Three reasons why the official cash rate matters if you have savings

The Good

There's not much good news when it comes to saving money in the bank at the moment.

Interest rates on deposits are low and a cut to the official cash rate would likely send short term rates even lower.

September's cash rate cut saw a flurry of banks slash their short term rates ahead of the cut.

There hasn't been any similar moves this time round but that doesn't mean they won't happen after the rate cut.

One positive is that inflation is also low so the value of savings is not being eroded.

Jeff Matthews, an investment adviser at Forsyth Barr, said between 1970 and 1990 inflation averaged around 11 per cent in New Zealand - a level that made it tough for people with money in the bank to keep up with increasing costs.

At the moment the average is under 2 per cent.

While it's tough for savers here Matthews said it could be worse.

In Europe people who invest their money in the bank may come out with less than what they put in.

Matthews said people looking for a better return could consider investing in shares like listed property companies and power companies where they could get a dividend return
of around 6.5 per cent.

But the trade off was dealing with market volatility.

"It's like owning a rental property where the rent is stable but the capital value fluctuates."

The Bad

Rates could drop further.

Economists have talked about three cuts this year but there is now also some speculation if that world economy doesn't pick up that there could be further cuts to the official cash rate next year.

That could mean deposit rates head even lower.

In the past people could lock their savings in for longer periods such as five years to get a better rate but there's not much difference in the interest rate on a six month term deposit and a five year one at the moment.

Matthews said the problem with term deposits was that it was not possible to break them any more so they lacked flexibility if people needed access to the money.

He also warned people off locking their money into longer term rates because of the possibility that rates could increase during that time.

Longer term rates are linked to the international borrowing market and the US Federal Reserve is expected to lift its cash rate as soon as next week, he said.

The Ugly

What could make the situation get ugly is a jump in inflation.

Inflation has been under 2 per cent for some time but if prices were to rise it could increase.

Matthews said an inflation rise was not expected so if it happened it would catch people out.

A big increase in petrol prices or imports would make it tougher for people trying to live off a tight budget although it's likely the Reserve Bank would increase the official cash rate if inflation reared it's head.

A higher rate would feed through to higher deposit rates.