KEY POINTS:
The 1.5 percentage point drop in the official cash rate is expected to force investors and retirees out of their comfort zones as they look for ways to maintain income levels in the falling interest-rate environment.
While mortgage-holders celebrated yesterday's landmark Reserve Bank OCR cut from 6.5 to 5 per cent, it will be unwelcome news for thousands of investors who rely on income from interest on bank deposits.
Spicers senior financial adviser Jeff Matthews said many would be faced with tough decisions on whether to keep their money in the bank or look elsewhere to maintain income levels.
"In the past people have been able to abdicate those decisions because they could get 8.25 per cent on call. They just got 8 per cent and could go to sleep."
But with the official cash rate dropping banks were also expected to drop interest rates on savings and term deposits. After tax on the interest was taken into account many would be left with a return of 4 per cent or less - a level barely in line with inflation.
"It's going to force people out of their comfort zone," Matthews said. "Bank interest at 4 per cent is not enough to live off, so they will have to start chewing into their capital or looking elsewhere."
He said the last time the interest rates were so low, five years ago, investors fled to finance companies. "It was what triggered the explosion in finance companies."
Finance companies covered by the Government's deposit guarantee scheme have already been flooded with money from investors, causing their rates to drop.
Matthews said those companies remained an option but investors should not lock funds in beyond the guarantee cut-off in October 2010 and should stick to bigger names.
Another option were corporate bonds being issued by some of the banks and major listed companies. Bond issues allow the company to borrow money from the public for a set time while paying interest.
Matthews said bond interest rates had also fallen of late, albeit still generally higher than bank interest as investors had to lock their money in for a certain amount of time.
But one area investors might not have considered was shares in companies with high-dividend payouts. Some companies had double-digit dividends yet prices were down.
