Who wins and who loses when the Bank of Canada lowers its interest rates?
Toronto, ON
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June 27, 2024 01:21 PM Eastern Daylight Time
by David Saric
The Bank of Canada, lowered its interest rate on June 5, bringing down the overall rate to 4.75%. Bank governenor Tiff Macklem revealed that: "We've come a long way in the fight against inflation," and there is no need to keep a restrictive monetary policy.
What does this rate increase mean for the average Canadians? How will those with mortgages, debt, savings and investments be impacted?
According to Tyler Thielmann, President and CEO of Spring Financial the winners in this situation "are the people who have variable rate debt who should see an immediate change in their interest costs and more money in their pocket each month."
However, for Thielman, deciphering who the losers are is not as easy as it seems.
"Losers is a bit harder to answer; we’ll need to see how things shake out. Typically, lowering interest rates is meant to spur on the economy and encourage growth. If the economy is in fact struggling, that could have a negative impact on many Canadians. Time will tell."
When asked about why the Bank of Canada put forth this decreased, Thielman speculated that it was to prevent an economic collapse due to forthcoming mortgage renewals.
How Canadians may or may not benefit from this rate decrease
For those who currently own a home, the news from the Bank of Canada should engender a sigh of relief across the nation.
Moreover, "If you have a variable rate mortgage, the rate cut should be reflected in your interest rate right away, as banks will typically adopt these cuts," Thielman said.
Additionally, if you’ve borrowed against your home to do renovations, those types of lines of credit are variable most of the time, which means you should be getting a break right away.
While many may feel the positive implications of the rate change, some Canadians may not be impacted that positively.
"For many people who got a mortgage 5 years ago in 2019 when interest rates were under 2%, this announcement is a tiny cut in the big picture," Thielman said.
"The key interest rate is still over two times what they were and your payment on renewal is likely to be much higher."
For those who took out a loan in 2020 after the pandemic hit, they are still looking at a massive increase in interest costs if rates are still around this level next year when they need to renew.
Winners and losers aren't clearly defined in a rate drop
When trying to further clarify who is the winner and the loser, there can be numerous factors that can complicate things. However, there are general rules that some experts use to judge.
David Gray, professor of economics at the University of Ottawa, says “More generally, unanticipated inflation hurts savers and helps borrowers.”
“Once the actual inflation has been factored into nominal interest rates, then borrowers start to lose,” Gray adds.
For those suffering from the scorching heat of debt, Gradojevic advises to refinance any current variable-rate debt if it is “sensible.” Plus, focus on lower consumption, when possible, and invest in a high interest savings account (HISA) or term deposit, such as a guaranteed investment certificate (GIC).
For instance, online bank Tangerine offers GICs from a 90-day term to a 5-year term, with interest ranging from 3.50% to 5.20%. As of mid-2024, the best rates offered were on the Tangerine 9-month GIC with 5.15% and the Tangerine 1-year GIC with 5.20%.
If you'd prefer easy access to your cash — with no lock-in period — consider opening a HISA. Good options include:
- Laurentian Bank's HISA (with no minimum balance)
- EQ Bank HISA
- Simplii Financial HISA
Another good option is to consider a hybrid banking option, such as KOHO. As a fintech, KOHO has become incredibly popular since its launch, thanks to higher interest rates and low fees/limited conditions. They aren’t just another online bank, but a Canadian technology company that offers a lot of added perks. KOHO is a free downloadable app that allows Canadians to manage their money easily, and earn interest. It's like a chequing account with the perks of a credit card. The app connects with a pre-paid Visa card, so you can budget, spend, and save at the same time. Open a KOHO savings account and earn 3% interest on deposits, with options to earn more for completing everyday tasks, such as buying groceries or paying.
Tips for first-time home buyers navigating the current housing market
Thielman strongly advises against buying a house now that the interest rate has slightly dropped, revealing that he hasn't "heard many success stories of people trying to time the market for their principal residence especially because rates have only come down a fraction."
"This likely doesn't make too much of an impact on affordability, and in previous cycles we've seen an uptick in activity once rates come down."
Instead, Thielman advises to only purchase a home if you are able to afford it in the present and can afford the current interest while leaving some buffer room in case the rate were to increase again.
First-time homebuyers may find the task of saving for what is likely their biggest purchase in life quite daunting. While being financially prudent is important, there are certain products and services out there that can help bolster your savings.
A tax-free savings account (TFSA) is a good place to start, since it shelters savings interest and investment earnings from being taxed, which makes it a great place to park your cash, GICs, mutual funds, securities and more. The TFSA has been available in Canada since 2009, and each year the Canadian government sets a maximum annual contribution amount for every Canadian 18 years of age and older.
EQ Bank recently expanded its offerings to include TFSA Savings Accounts to those with an existing EQ Bank Savings Plus Account. The interest rate on this account is 3.00%, which is the regular interest rate, not a promotional rate. EQ Bank's TFSA appeals to those looking to earn the maximum possible tax-free interest but want their assets liquid enough to access at a moment’s notice.
Managing your finances to achieve financial goals
With the rising cost of living, it takes some potentially tough decision making to set you on a positive financial trajectory.
"I'm a big believer in having honest conversations with yourself. Is your income truly enough to give you the lifestyle you want in the city you live in?" Thielman said.
It may be more than just trying to cut out your daily Starbucks beverage to save a few extra dollars.
"If you don't see a clear path for yourself, you need to consider making some significant changes either finding a way to level up your income or change your living scenario," Thielman added.
Being honest with yourself is the best place to start. You likely can't change the current financial climate, just how you are responding to it.
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Aaron Young
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