Something to smile about - $60 a week extra
By TINA LAW - The Press | Friday, 24 October 2008

Homeowners could be nearly $60 better off each week after tax cuts and falls in interest rates and petrol prices.

After months of rising costs, homeowners are getting some relief, with the average income earner now receiving an additional $16.50 a week through tax cuts, spending about $25 less a week to fill the car and saving about $14.50 a week in interest costs on the mortgage.

Home mortgage rates are falling and are likely to continue to drop well into next year after the Reserve Bank yesterday cut the official cash rate (OCR) by 100 basis points from 7.5 per cent to 6.5%.

Economists expect banks to pass the full cut on to floating mortgage rates but are unsure how much fixed-term rates will fall by.

A homeowner with a $200,000 mortgage over 20 years would save $758 a year, or $14.58 a week, if banks dropped their fixed rates by 50 points from 8.7% to 8.2%, Kiwibank said.

About 100,000 households with $13 billion of mortgages rolling over this month and next month are set to benefit from the fall in rates.

Tax cuts that took effect this month are worth $16.54 a week for the average income earner on $45,000.

A 4c drop in petrol prices yesterday is the 10th consecutive price drop since petrol hit record highs in July, taking 91 octane petrol to $1.74 a litre.

All petrol retailers cut their petrol prices by 4c, taking prices back to levels last seen in February.

A litre of 95 octane now costs $1.78. Shell and BP also cut diesel prices, a litre now costing $1.32.

Petrol is about 47c a litre cheaper than its July peak, meaning it would cost $25 less to fill up the average family car's 55-litre tank once a week.

The OCR cut was the biggest since the OCR was introduced in 1999 and only the third time a drop had been larger than 25 points. The other two were 50-point cuts after the September 11, 2001, terrorist attacks in the United States.

Kiwibank was the first to react to the fall, dropping its floating rate from 9.7% to 8.7%.

Westpac dropped its floating rate to 9.45%.

Kiwibank's floating-rate drop would save a homeowner with a $250,000 mortgage, over 20 years, $1941 a year, or $37 a week. The bank's two-year fixed rate is now 7.79% and is $934 a year cheaper than Westpac's 8.29%.

TSB and ASB also lowered their rates yesterday, and more banks were expected to follow.

Westpac chief economist Brendan O'Donovan said Kiwibank and Westpac had dropped their fixed rates in anticipation of the cut, so moves by other banks would be large as they played catch-up.

Reserve Bank Governor Alan Bollard said financial market turmoil and a deteriorating outlook for global growth played a large role in the cut.

He said economic activity in New Zealand would be further constrained by international developments.

The timing and extent of further reductions would depend on world financial developments and a drop in inflation, he said.

O'Donovan expected the rate to fall another 50 points in December and by 25 in both January and March to finish at 5.5%, but any moves after that would depend on the state of international markets.

Economists were reluctant to say how far interest rates would fall, but O'Donovan said he could see the two-year fixed rate dropping to 7.5% next year.

The latest OCR drop came after inflation hit 5.1% this week.

From here.