Which financial products are and aren’t affected by the Bank of Canada’s rate decisions?

The Bank of Canada (BoC) handed down another hike to the overnight interest rate this week — raising it by 50 basis points, to 3.75%, on October 26.

Canada’s central bank has been raising rates aggressively over the past year in order to help rein in inflation. Most Canadians understand that these decisions affect variable mortgage rates, but what other financial products are impacted by the BoC’s policy moves? The answers might surprise you.

Understanding the prime rate

BoC rate changes impact interest rates on most financial products, such as mortgages, lines of credit, and savings accounts that consumers (and businesses) in Canada get from their banks.

“The BoC rate hikes affect all financial products, some more directly than others, with different lags on different products,” says Farah Omran, an economist for Scotiabank. Omran notes that the BoC rate hikes directly affect products with interest rates that are tied to the prime rate, such as variable-rate mortgages and lines of credit. However, some impacts will be felt right away, while others are a bit more delayed.

“The prime rate moves with the BoC overnight rate, and the variable mortgage rate moves accordingly — a direct impact,” she explains. “Other products, like fixed-rate mortgages, are indirectly impacted by the BoC rate hikes, as they are benchmarked to the Government of Canada bond yields.”

Here’s a rundown of financial products the BoC rate decisions do and don’t affect.

Variable-rate mortgages: Yes

Since variable-rate mortgages are based on the prime interest rate, which is tied to the BoC overnight rate, any increase (or decrease) has a direct effect on your mortgage rate.

The good news is that you can lock in to a fixed-rate mortgage at any time, which may be a smart move if rates are expected to continue rising. Just keep in mind that interest rates on fixed-rate mortgages are slightly higher than variable-rate mortgages.

Fixed-rate mortgages: Not directly

Since fixed-rate mortgages aren’t directly based on the prime rate — and since they’re locked in for the duration of your mortgage term — you won't see a change to your monthly payments in the event of a BoC rate hike. That said, you won’t benefit from a decrease, either, should rates take a sudden dip.

Omran says the rate on the most popular five-year fixed-rate mortgageis benchmarked to the government’s five-year bond yield, which increases when the BoC’s overnight rate is increased or is expected to increase.

Credit cards: No

The fixed interest rate on credit cards doesn't adjust with any rate changes made by the central bank. That said, if you aren’t making your monthly payments by the due date, your credit card issuer may increase your interest rate by 5%. You might also lose access to any promotional interest rate you previously had. This increase could be temporary or permanent.

While federally regulated financial institutions, such as banks, must notify you before an interest rate increase on your card takes effect, they can ultimately change your rate at any time with no reason required. Make sure to carefully read your cardholder agreement, so you know the terms and conditions of any interest rate changes.

Personal lines of credit: Yes

A personal line of credit is tied directly to the BoC overnight rate and is usually calculated as prime plus a certain percentage, which is based on your creditworthiness.

When the key interest rate moves, so do interest rates on personal lines of credit. This results in less of your monthly payment going toward the principal, and more toward interest.

Home Equity Lines of Credit (HELOCs): Yes

As is the case with personal lines of credit, the interest rate on a home equity line of credit (HELOC) will move in tandem with the BoC rate.

Canadian HELOC debt has been rising along with interest rates, with homeowners now owing more than $171 billion in HELOC debt. A June Leger survey conducted on behalf of RATESDOTCA and BNN Bloomberg revealed that nearly a third homeowners in Canada have a HELOC, with nearly two-thirds of those carrying an outstanding balance.

Personal loans: Maybe

Whether the BoC rate change will affect your personal loan depends on what type of loan you have. Fixed-term loans, such as most car loans and traditional bank loans, are not tied to the BoC rate, so changes to the overnight rate will not affect your payments. But variable-rate loans are impacted.

However, if you’re carrying a student loan through the government, you’ll feel the hit. That’s because the interest on these loans is calculated either at a fixed interest rate of prime plus a certain percentage or using a floating interest rate. However, interest accumulation on Canada Student Loans is suspended until March 31, 2023.

Savings accounts: Yes

Technically, rising interest rates should start to put pressure on the banks to offer higher interest rates on savings accounts (including tax-free savings accounts), but many drag their feet on increasing interest rates.

Omran notes that banks are not obligated to raise the interest on savings accounts in step with increases to the BoC rate.

“However, as competitive pressures arise between banks, they eventually result in a rise that is lagged.”

Guaranteed investment certificates (GICs): Yes

If GICs are part of your investment strategy, you’ll be pleased to know that BoC rate changes affect the interest earned on these investments.

Because you’re locking in your money for a set period of time with a GIC, banks offer more favourable rates on these products than your everyday savings account.

Looking ahead to 2023: where will interest rates go?

Omran expects the BoC to continue rate increases for a while yet.

“We currently expect the BoC will need to tighten rates to 4.25% by the end of this year and keep rates at that level through much of 2023,” she says, before lowering rates to reach 3% by the end of 2024.

The Bank acknowledged more rate hikes are necessary in its most recent announcement.

“Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further.”

According to the Bank, future rate increases will be influenced by its assessment of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding.

“We are resolute in our commitment to restore price stability for Canadians,” it said, “and will continue to take action as required to achieve the 2% inflation target.”

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