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WEALTH ADVICE ​

 

How Do Interest Rates Affect You?

 3 minute read

 

senior couple looking at their finances at home on their laptop


Interest is the amount that must be paid when you borrow, or the income from your savings when you invest. Financial systems are built on this relationship, and it affects us every day.

Rising interest rates means that borrowing money could be more expensive, but you could also earn more on your savings. The interest rate paid on these loans and investments are typically influenced by the overnight rate set by the Bank of Canada (BoC).

Overnight rate (policy interest rate)

The Bank of Canada is our central bank, and its primary function is "to promote the economic and financial welfare of Canada.” The overnight rate is reviewed several times throughout the year and adjustments are made based on the economy’s performance and inflation forecasts. Based on this benchmark rate, each financial institution will set its own prime rate which is the rate they use when lending to consumers with the highest credit rating. Lending rates and some investment products, like the PRIMECONNECT® term deposit, are based on this prime rate so any adjustments up or down, will impact the interest calculated for these financial products. In periods of uncertainty (like a pandemic), interest rates can fluctuate a lot.

The Canadian economy contracted at the onset of the pandemic. The overnight rate was lowered to increase the money supply which helped Canadians purchase goods and services and support business owners in maintaining operations and supporting their employees. 

Now that recovery from the pandemic is trending positively, the Bank of Canada has raised their target for their overnight rate. This means your interest rates on products like variable mortgages and lines of credits are now likely higher than they were recently. However, these higher interest rates mean your savings may also grow faster.

How interest rates affect your savings

No matter which side you are on, either borrowing or lending, interest rates will affect you.

  • Low interest rate benefits:
    • Borrowers can benefit from lower lending rates. For example, consolidating higher interest rate loans and credit cards, into a personal line of credit (on approved credit) with a more favourable rate can save money in the long run. This could help pay your debts off faster through refinancing.
  • High interest rate benefits:

PRIMECONNECT® term deposit/GIC 

A prime-linked term deposit such as the three-year PRIMECONNECT® will allow you to take advantage of a forecasted overnight rate hike because it changes automatically with First West’s prime rate. With the PRIMECONNECT®, you enjoy high rates and flexibility to redeem once a year (on anniversary), while earning even more as the prime rate increases. It is available in non-registered and registered accounts including your Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP).

Term deposits, especially those linked to the prime rate when interest rates are expected to rise, are low risk investments that can help you reach your short-term goals but will also complement your long-term investment plans.

Save more today

The economic environment is becoming increasingly complex. Our financial advisors can help navigate financial shifts, such as increasing interest rates to make the most out of your savings.

Term deposits that will help you save more as interest rates rise are available through your local branch or our Member Advice Centre. Everything is easier with a little guidance. Contact us today!

 


Mutual funds, other securities and securities related financial planning services are offered through Qtrade Advisor, a division of Credential Qtrade Securities Inc. Mutual funds and related financial planning services are offered through Qtrade Asset Management Inc. Financial planning services are available only from advisors who hold financial planning accreditation from applicable regulatory authorities.