OCR cut unlikely to help first time buyers

The drop in the Official Cash Rate will help some homeowners but is unlikely to help first time buyers, the Property Institute says.

Banks quickly lowered their floating home-loan rates yesterday after the Reserve Bank cut the official rate for the first time in more than four years, from 3.5 percent to 3.25 percent.

The Institute's chief executive Ashley Church said it might encourage developers to build more houses but it was unlikely to help first home buyers or investors.

"So then you come to property investors and people who have an existing property who are looking at upgrading that property to a better one and potentially foreign investors.

"On an $800,000 mortgage 0.25 percent is about $40 per week so that's about $2000 per year, that's probably neither here nor there, it's not going to make an awful amount of difference," he said.

Meanwhile, the Finance Minister is dismissing fears Auckland house prices will soar further following the OCR cut.

Opposition parties said the bank has been forced to act to stimulate the economy - and there were warnings lower interest rates will inflame an already overheated Auckland housing market.

But Bill English did not think that would happen.

"I don't think it will fuel the rise much, I think there's a bit of a feeding frenzy going on there at the moment and at some stage the rate of inflation just can't keep increasing, it's just a matter of time."

Bill English said other measures already in place, such as the new property tax, should dampen demand.

Retired people 'hit hardest by interest cuts'

Meanwhile, Greypower said any cut to the benchmark interest rate would hit retired people in the pocket and many are likely to struggle after the latest move by the Reserve Bank.

That cut was likely to put downward pressure on savings rates and diminish the return to investors.

Wellington resident Jill Koopman retired 12 years ago and is living off her savings.

She said after a lifetime of putting money away she was living on peanuts because her savings are not up to much.

"I mean let's face it, I'm not even going to have a funeral when I die because I refuse to pay $12,000 for it, for the simple fact that, probably, by the time I die - I might live another ten years if I'm lucky - there mightn't be anything left."

She said she wished she had looked at other alternatives for her money earlier, but now she is staying conservative because of the risk of investing in the stock market or finance companies.

Mrs Koopman said this latest move will mean she will be very cautious with her money, and will only open her purse for the essentials.

"Dental care, health care, I don't get any discount at my dentist, I pay the same rate as a person going to work, you know, to walk through the door, you pay $80 to sit in the chair."

National President of GreyPower Terry King said any cut whatsoever in the Official Cash Rate did have an effect on its 70,000 members savings, the interest of which is used to supplement their superannuation.

He said many of them were vulnerable and struggling, and this latest move would mean they would become more frugal.

"When things get tight, they cut back on other things. It's a bit of a juggling act or a balancing act, and then when you take in the cost of electricity and petrol prices, all of these normal things, people on fixed incomes find it quite difficult to make these adjustments.

"So if they've got interest coming in from small little items of savings, then every little bit helps in these circumstances."

According to Reserve Bank figures, the value of household deposits was $141 billion in April, up ten percent compared with the same month last year.

'Bad news for savers'

Chief forecaster at Infometrics Gareth Kiernan said the cut to the official cash rate may not be great news for those with savings in the bank.

"We've seen those rates drifting down a little bit over the last few months, and if anything this is going to just add a bit more downward pressure on those, so if you've got your money in the bank, you're not going to be getting much of a return on that."

Financial adviser Martin Hawes said retired people and people saving for home loans tend to be the most adversely affected by falling interest rates.

"Regrettably, and I think inadvisedly, there are quite a lot of retired people who don't really stray much outside of bank deposits, so if there's a fall in bank deposit rates as I suspect there will be, those people will be quite adversely affected."

Mr Hawes said people who have only savings should look at putting some of their portfolio into things like bonds, shares or units in property trusts.

The Reserve Bank signalled further cuts may be needed.