It's been almost three years since the Reserve Bank made a move on interest rates.

But on Tuesday the RBA officially cut the rate to a record low of 1.25 per cent.

For those of you who have signed on to a mortgage in the years since 2016, it might be unclear exactly what this means for your home loan.

So we've done the homework for you to work out what exactly happens now that interest rates have been cut by 0.25 percentage points.

How much will you save on your mortgage?

Depending on your mortgage amount, you could soon be saving hundreds of dollars a year.

According to RateCity, the impact of 0.25 per cent rate cut on an average home loan worth up to $400,000 would be a saving of $700 a year.

Of course, that's for principal and interest repayments over a 30-year loan term.

They even worked out how much it would mean for a loan of $1 million (it's roughly $1,750).

When does it get passed on?

Well, the big four banks have already announced they will begin passing on rate cuts in June.

ANZ has already announced that it will not be passing on the full cut, instead it has reduced its variable home loan rate for customer by 0.18 per cent from June 14.

Commonwealth Bank, on the other hand, said it would pass on the 0.25 per centage point cut to its variable home loan customers from June 25, as will NAB (although that will be effective from June 14).

Meanwhile, Westpac has passed on only a 20 basis point rate cut for most variable home loans, but 35 basis points for interest-only property investors from June 18.

The bank is also offering a 3.49 per cent five-year fixed rate for new first home buyer customers.

According to RateCity, the change in standard variable rates for owner-occupiers paying principal and interest repayments on a 30-year loan worth $400,000 (excluding fees) is:

Bank Old standard variable rate New standard variable rate Saving per year CBA 5.37 per cent 5.12 per cent $743 Westpac 5.38 per cent 5.18 per cent $588 NAB 5.36 per cent 5.11 per cent $743 ANZ 5.36 per cent 5.18 per cent $536

Some smaller lenders will also pass on the rate cut in full, including Athena, RACQ and Reduce Home Loans.

There had been pressure from the Government for the banks to pass on the interest rate in full. Here's Treasurer Josh Frydenberg:

"It is the Government's expectation, indeed it is the public's expectation, that banks should pass on, in full, to consumers, the benefits of reduced funding costs as a result of the Reserve Bank's decision," he said.

And what if you don't have a mortgage?

If you're a saver or a self-funded retiree, this is not exactly good news if you're relying on higher interest rates.

Shaw and Partners banking analyst Brett Le Mesurier previously argued the banks had little choice but to pass on the cost of a Reserve Bank interest rate cut to depositors.

But since interest rates have already been at a record low, it's unlikely you'll notice this too much.

Why is the RBA doing this?

RBA governor Philip Lowe said the hope was today's decision would "help make further inroads into the spare capacity in the economy".

"It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target," he said.

The RBA appeared to have been reluctant to cut rates in previous months for fear of further driving up risky household debt.

But many analysts had begun to see recent weak economic indicators as a sign the RBA would move rates.

That's because the inflation rate is below the RBA's target band while the unemployment rate has risen to 5.2 per cent and there are signs of more weakness ahead.

Since last month the RBA governor himself had raised expectations by explicitly stating that today's meeting will consider the case for lower rates.



Does the RBA only ever cut by 25 basis points?

The RBA had appeared reluctant to cut rates in previous months. ( AAP: Glenn Hunt )

Nope. If you have a look at the RBA's website, you have to scroll a little ways down before you see a 0.25 per cent change.

And if you scroll a little further, you'll notice 0.50 per cent change on May 2, 2012.

It's not the only time interest rates have been cut by more than 0.25 percentage points, in fact during the global financial crisis there were times when the RBA cut a full percentage point in one meeting.

But back in 2008 and 2009, the interest rate was a lot higher at 4 or 5 per cent.

Nowadays, with interest rates at just 1.25 per cent, the RBA has less wiggle room to move.

So could rates fall further?

Some analysts are expecting another rate cut by the end of this year, likely another 0.25 percentage point cut between August and October.

In an analyst note NAB said the RBA's own statement suggested they were "standing ready to further support the economy and employment".

"That doesn't provide much clarity as to whether there will be a further cut next month — the governor's speech tonight may provide further clues here," it said.

But some are expecting the RBA could go even further than 1 per cent.

According to another analyst note, Capital Economics thinks that rates will fall to 0.75 per cent over the coming months.

"Rates falling below 1 per cent will surely heighten speculation that the RBA will soon launch quantitative easing but we think that's rather unlikely," it said.

JP Morgan has the lowest mainstream forecast, expecting rates to fall to 0.5 per cent sometime next year.