How does the Bank of Canada affect your savings account rate?

There are a few reasons why your savings and/or mortgage rate might fluctuate, the main ones include the current economic climate, and the Bank of Canada. Let’s dive into the real talk behind why banks change their rates.

Rates 101

First, some basics.

The Bank of Canada Policy Rate (aka the Overnight Rate):This refers to the rate at which themajor Canadian banks borrow and lend funds between each other. The Bank of Canada sets the target level for that rate.  

The Prime Rate (aka The Prime Lending Rate): The Prime Rate is the annual interest rate the major Canadian banks use to determine interest rates for lending products such as variable rate mortgages, loans, and lines of credit.

While the Overnight Rate and the Prime Rate are very closely related, they are not the same. However, they both influence the rates at which banks lend their money, as well as the rates paid on savings accounts.

What this means for you

When the Bank of Canada rate is up, it’s likely your savings rate will be as well, whereas a decrease from the Bank of Canada will likely reflect in the opposite direction. When rates change, just like you would with a big purchase, shop around! Accounts with the highest savings rates tend to be digital banks (like us) who don’t have the overhead of brick-and-mortar branch locations. Some of these will come with additional perks, like free transfers, no monthly fee accounts, and no minimum balances. 

Another thing to keep in mind when rates change is your mortgage. When the Prime Lending Rate fluctuates, so will your mortgage rate, if you are in a variable rate mortgage, potentially allowing you to take advantage of savings without lifting a finger. That said, it is worthwhile to note that if the Prime Lending Rate increases, your variable mortgage rate will follow suit. Seeking expert advice on this matter is key. Talk to your mortgage broker to find out what is best for you.

The main reasons the Bank of Canada rate changes are to help stabilize housing costs, curb spending, and control the economy. When rates are low, Canadians will tend to borrow more and save less. When rates are high, Canadians will focus more on their savings and may be less inclined to accumulate debt. Both savings and borrowing rates are impacted by fluctuations in the Prime Rate.

To put it simply, if the Prime Rate is up, you’ll likely earn more on your savings, while borrowing money will tend to be pricier. When the Prime Rate is down, you may save on your mortgage rate, while you may be earning slightly less on your savings than you were previously.

Both savings and borrowing rates are impacted by fluctuations in the Prime Rate, so while those with variable rate mortgages are reaping the rewards if the Prime Rate dropped, savings clients might be less than thrilled to hear their savings are accumulating less interest than they were yesterday.

Don’t leave money on the table

Bottom line, wherever rates are headed, there may be a way for you to save. While a change in your interest rate may not always be the best news, it shouldn’t keep you from taking advantage of the savings you can access, whether through your savings account, or a change in your mortgage rate.

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