The size of the Reserve Bank's cut to interest rates last week of three-quarters of a percentage point caught everybody by surprise. It was the third cut in three months and takes the cash rate to 5.25 per cent. With economic conditions deteriorating, it is likely there are more cuts to come as the central bank pulls out all the stops to try to avoid Australia dipping into recession.

The big banks say their cost of funding is still high and have not been passing on the full cuts to their home-loan borrowers. The Commonwealth Bank, Australia's biggest mortgage lender, was the first of the big banks to announce a lowering of its standard variable mortgage rate, by 0.58 of a percentage point to 7.74 per cent.

For home-loan customers with a $200,000 mortgage, that represents a saving of just above $70 a month and a saving for those with a $400,000 mortgage of more than $140. The total monthly saving of the past three rate cuts by the Commonwealth Bank on a $400,000 mortgage is more than $540.

NAB and Westpac followed the Commonwealth Bank's lead and have not passed on the full 0.75 percentage point cut. NAB will pass on 0.62 percentage points and Westpac will cut its interest rate by 0.65 percentage points.

Members Equity Bank has announced it will pass on the full 0.75 percentage point cut to its borrowers.

While that is good news for borrowers, experts who research the lenders say that even bigger savings can be made by shopping around. With a bit of arm twisting, the lender may even pass on the full cut.

The first step for borrowers is to go to research websites cannex.com.au and infochoice.com.au to find out how their mortgage compares with what is offered by other lenders. Armed with this information, they can approach their existing lender and ask for a discount. If the borrower uses a lot of the lender's services, then they should remember to point that out.

Andrew Inwood, founder of financial services industry market researcher Brandmanagement, says most people never bother to ask but many lenders will offer discounts to retain business. He says some of the big banks are "routinely" discounting their interest rates by a quarter of a percentage point and some will discount by more.

While going to a mortgage broker is convenient, be careful because they do not always offer the best deals.

Consumer watchdog Choice recently shopped around on behalf of three borrowers. It found the best deals came through switching to mortgages offered by credit unions and the online lending channels of the big banks. However, these deals were not always offered through mortgage brokers. Choice found credit unions and building societies have, on average, "lower variable interest rates and lower fees than the Big Four banks".

Frank Lopez, an analyst with researcher Cannex, says those who took out fixed-rate mortgages before the middle of the year when the expectation was for rate increases would be kicking themselves now rates are falling. "Borrowers on fixed rates likely face huge break costs if they want to get out to take advantage of further possible rate cuts," he says.

They need to carefully consider whether the savings in interest rates will outweigh the break costs. Cannex data shows the cheapest three-year fixed rates are about 7 per cent. While the big banks' standard rates are about 7.7 per cent, most borrowers receive a discount of about 0.5 of a percentage point . That makes the variable rate most people pay, at 7.2 per cent, only slightly higher than three-year fixed rates.

With interest rates likely to fall further, choosing variable rates looks like the better option.

More for the money

Markets are pricing in rate cuts that will take the cash rate to 3.75 per cent during the next six months.

The Reserve Bank has indicated it is prepared to cut even further to head off the worst of the global financial crisis.

AMP Capital Investor's chief economist Shane Oliver says the cash rate will most probably reach a low of 3.75 per cent by September next year but the Reserve Bank may have to cut even more.

"Unfortunately, it now looks like we are on the way to a mild recession," Oliver says.

"The threat to growth domestically is far more significant than was the case when interest rates were lowered to 4.25 per cent in 2001, which was the last low for interest rates."

CommSec chief equities economist Craig James is expecting the cash rate to be cut by another 0.25 percentage point next month. The Reserve Bank may then "sit back and see what the impact is on the economy".

He says the Reserve Bank may have to reduce rates again next year and the cash rate may have to be cut to 4.5 per cent.

"The speed of developments has taken everybody by surprise," James says.

"Midyear the Reserve Bank still thought that the next move in rates would be up rather than down." However, it is possible that things could turn up just as quickly as they have turned down.

"If the Obama effect comes through, perhaps everyone will become a little bit more optimistic again and we will get an upturn like the one we saw with the Iraq war in 2003, after which there was a global bull market," he says.