OCR drop - five quick answers to the big questions

The Official Cash Rate (OCR) dropped to a historic low overnight, but what does it mean for you?

1. What is the Official Cash Rate?

The Official Cash Rate (OCR) is basically the wholesale cost of borrowing money. It's an interest rate set by the Reserve Bank that influences all other interest rates. When it comes to mortgages, in general, the lower the OCR, the lower bank interest rates and the easier it is to borrow money.

2. What does it mean for me?

The OCR is quality control on the economy. If the rate is high, it makes investing in the government more attractive, so there will be less money in the economy. If the rate is low, there will be more investors which, in theory, should stimulate the economy and encourage investment in other assets - for example, sharemarkets, business investment, and property!

3. The OCR has dropped, what are the benefits?

The flow-on effect of the OCR drop is that banks will likely cut their interest rates, and maybe even loosen policy to make it easier to borrow. If money is cheaper and more easily available, you can pay off your mortgage faster or borrow more!

4. I need to refix my mortgage soon - any tips?

In general, you'll save more by fixing for short periods of time. If rates are flat, why fix long-term? The reason banks are advertising historically low two and three-year rates is that they probably expect rates to come down even further in the future.

The way you put your mortgage together is much more important than the interest rate. Are you certain your mortgage is working hard for you?

5. I want to buy my first home - is the OCR cut good for me?

Yes it is - bank interest rates should drop, but it's what happens behind the scenes that will be most beneficial to you. Lenders will interpret the drop in different ways, and we'd expect many to make favourable changes to the way they assess mortgage applications, making lending easier to obtain.


Speak to your adviser today if you have any further questions about how the OCR cut may affect you.