How the Bank of Canada’s interest rate announcement affects Canadians

All Posts

Two Canadian men talking about the recent Bank of Canada announcement and how it will impact their finances.

The Get

For this week’s No More Ls column, we’re covering how not to lose out on money when interest rates change.

The new rate was just announced. Find out what it means for your savings—and for affordability.

By Jared Lindzon

Today (Oct. 29), the Bank of Canada announced a new key rate of 2.25%, a drop from its previous rate of 2.5%. Like the changing of the seasons, Canada’s interest rate policy announcements affect the everyday lives of Canadians, whether they pay attention to them or not. Knowing what’s in the forecast can help them dress appropriately. Unlike seasonal change, however, this recurring event happens eight times a year, on a schedule set by the Bank of Canada, the country’s authority on all things monetary policy.

During those announcements, the BoC—as it’s often referred—will either increase, decrease or maintain what’s known as its “policy interest rate,” each with far-reaching implications for Canadians.

The Bank’s goal is to keep the economy running at a reasonable temperature. If it gets too hot, price inflation could get out of control, but if it gets too cold businesses may struggle, leading to layoffs.

When a change occurs, it’s typically by only a quarter or half a percentage point, which may sound small, but can have huge implications for affordability and savings. If you borrow money, save money, invest money, or are employed by a company that does any of those things in Canada, chances are you’re going to feel the temperature change.

Why it matters when the rate goes up

The Bank of Canada increases interest rates to help reduce inflation and cool an overheated economy, typically when prices are on pace to grow more than 3% in a year.

When interest rates go up borrowing becomes more expensive, with direct and immediate implications for those with a variable-rate loan product—like a variable-rate mortgage or home equity line of credit—and indirect implications for everyone else.

Those with a variable-rate loan will instantly see either their monthly payments increase or their debt getting paid off slower. The same goes for new fixed-rate mortgages, auto loans, business loans or lines of credit; the higher the interest rate, the more the loan will cost.

“The lender’s portion [of the rate] is usually fixed, so if a bank offers ‘prime plus 2%’ that means they’re charging you whatever the prime rate is, plus 2%,” explains financial educator Eduek Brooks. “If the prime rate goes up, your total interest rate goes up as well.”

Higher interest rates, however, aren’t always bad news. Just as there are many ways to enjoy a snowy winter’s day, there are lots of great ways to take advantage of the economy, even if the BoC is trying to cool it down.

“If the interest rate is going up you can earn more interest on your savings accounts and GICs [guaranteed investment certificates],” Brooks explains. “It’s usually a time when people lock into GICs or get into interest savings accounts, since they can earn a little more interest.”

Higher borrowing costs also create challenges for businesses that rely on debt, since they need to pay more to borrow money, which could result in hiring freezes and layoffs or negatively impact their stock values. Or, as billionaire investor Warren Buffet famously said: “A rising tide lifts all boats; only when the tide goes out do you discover who's been swimming naked.”

Why it matters when the rate goes down

When the economy runs a little cold, the Bank of Canada might elect to turn up the heat by lowering its policy rate.

Lower rates mean borrowing is cheaper, which leads consumers to buy more stuff, which means businesses are often swimming in cash (sometimes naked).

Those with a variable-rate mortgage on a fixed payment term can pay off their debts faster, while those with a variable-rate loan where payments fluctuate will see their monthly mortgage costs drop.

“If you have a variable-rate mortgage with a variable payment, that rate going down even a quarter-point could mean that you are paying $50 to $200 less each month,” says Lianne Hannaway, a CPA and wealth coach for first-generation professionals.

Those shopping around for a new loan product, meanwhile, can often lock into a lower-cost repayment plan following a drop in rates.

“For new mortgages and mortgage renewals, most banks will let you lock into a rate up to three—sometimes even six months—in advance,” Hannaway explains. “If rates change in your favour, they usually offer you that better rate, but if rates go up, you can keep the better rate you locked in.”

Though savings products like GICs won’t pay out as much after rates go down, Hannaway says, it’s a great time to put those savings toward paying off debts, as those payments will go further.

Whether rates go up, down or stay the same, Hannaway says the announcement offers Canadians an opportunity to consider whether their finances are “dressed appropriately” for the current climate—or whether they need to add or shed some layers.

“Those eight times a year are just a good opportunity to see what financial products you have and if you can get a better rate somewhere else.”

Jared Lindzon is a Toronto-based freelance journalist writing for the publications such as The Toronto Star, The Globe and Mail, The National Post and a number of others.