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Welcome! This Padlet has been created by Justin Bell, Nolan Barkey, and Brandon Daynard. Here you can expect to learn all about interest rates in Canada, including which factors affect the fluctuation of Canadian interest rates. 

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Welcome! This Padlet has been created by Justin Bell, Nolan Barkey, and Brandon Daynard. Here you can expect to learn all about interest rates in Canada, including which factors affect the fluctuation of Canadian interest rates. 

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It is very important to keep track of your credit score and ensure that you maintain a good credit score. People with low credit scores will have to pay higher interest rates when taking out a loan. While people with high/good credit scores will be offered lower interest rates on loans.

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The bank of Canada has committed to keeping interest rates low until 2025. The Bank of Canada has decided to keep interest rates low due to the effect of the pandemic on Canadian households.

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How Credit Score Affects Loan Interest Rates - Website #1

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How Credit Score Affects Loan Interest Rates - Website #1

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This article talks about the direct correlation between interest rates and credit score. It shows us that a bad credit score will result in higher interest rates
When acquiring a loan nobody wants to pay very high interest rates, a key factor in determining interest rates is ones credit score. The reasoning behind this is because a bad credit score indicates you don't make payments on time and this is disconcerting to the lender. One piece of information I found useful in this article is the ways to improve credit scores as well as the graph indicating the direct relation to credit scores and interest rates.

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The interest rate that you are offered by a lender has a big impact on the cost of borrowing money.

A lower interest rate makes it less expensive to take out a loan or use a credit card because there's less interest added to your monthly payment. Lower interest rates are highly sought after because you pay less money to whoever has loaned you money.

Interest rates on credit cards and loans aren't set arbitrarily. Banks use your credit score to help them set your interest rate.

Credit Score vs. Interest Rate

Your credit score is a number that measures your creditworthiness. It tells lenders how likely you are to pay your bills on time or repay money that you borrow.

Higher credit scores are best because they indicate that you've handled credit well in the past and are likely to pay new credit on time. Lower credit scores demonstrate that you've made some big mistakes in the past and may not make all your payments if you're given new credit.

The interest rate you are charged on a loan is how banks make money and limit risk. If a bank thinks you are more likely to default on a loan, they want to charge you a higher interest rate so they can recoup more of the cost of that loan early on.

The better your credit score, the better risk you are for a bank or other financial institution. This means that the higher your score, the lower your rate.

How Credit Score Impacts Credit Card Rates

Credit card issuers disclose a range of potential interest rates with each credit card offer.

For example, a card may advertise a 13.99% to 22.99% APR depending on your creditworthiness. Your final APR would fall somewhere in that range based on your credit score and other risk factors.

Card issuers don't advertise what credit score will give you a specific interest rate. That won't be determined until you make the credit card application. In general, if you have a good credit score, you can expect to receive a lower APR. With a bad credit score, you'll receive a higher APR.

How Credit Score Impacts Loan Rates

With loans, an average rate is often advertised instead of a range. If you have a good credit score, you may qualify for a rate that's at or below average. Or, with a bad credit score, you may end up with a rate far above the average.

You can use a loan savings calculator to find out how much you can save on a loan based on your credit score. The calculator shows sample APRs and monthly payment for mortgage or auto loans with specific repayment periods for various credit score ranges.

You won't know what APR you'll be offered until you apply and are approved for a loan. Different lenders may also offer you different terms on interest rates. If you are taking out a loan, it can pay to get rates from several lenders, no matter what your credit score is.

How to Improve Your Interest Rate

Banks are required to give you a free copy of your credit score when it leads you to be approved for a less than favorable interest rate. The credit score disclosure will also include a few details about what's driving your credit score.

For a FICO score, these factors include:

Payment history: Your history of making payments on time (or not) is 35% of your credit score.

Amounts owed: How much outstanding debt you already have makes up 30% of your credit score.

Length of credit history: How long you have been borrowing and repaying money for makes up 15% of your credit score.

Credit mix: The variety of credit accounts you have makes up 10% of your credit score.

New credit: How recently you have opened new credit accounts, and how many you have opened, makes up the final 10% of your credit score.﻿﻿

To improve your chances of getting a better interest rate, you can spend a few months working to raise your credit score. It is especially important with a major loan like a mortgage where a higher credit score can decrease your monthly payment by hundreds of dollars. This can save you tens of thousands of dollars in interest over the life of the loan.

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How a Credit Score Influences Your Interest Rate

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The interest rate that you are offered by a lender has a big impact on the cost of borrowing money. A lower interest rate makes it less expensive to take out a loan or use a credit card because there's less interest added to your monthly payment.

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This article touches on what interest rates are, the history of the bank rates in Canada, and overnight rates. Most importantly, this article discusses the three main factors that affect the fluctuation of interest rates: risk on behalf of the lender, the expected time it will take  for the loan to be repaid, and the purchasing power of the money.
We chose to include this article because it perfectly captures exactly what it is we are discussing, which is the factors that affect the fluctuation of interest rates.

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​Interest, Credit and Loans

Interest refers to the amount of money that a borrower pays for money borrowed. Interest payments do not reduce the principal amount (the original amount of money borrowed). Interest is usually paid in increments. To calculate the money owed at each increment, a percentage rate or interest rate is set and agreed upon. For example, a $100 loan with a 3 per cent monthly interest rate means that the borrower will owe the lender 3 per cent of the remaining balance of their debt at the end of the payment period. The interest arrangement means that if the borrower continues to owe the full $100 after the first payment period, he or she will be charged $3 in interest and will owe the lender $103. Interest is integral to credit and loan agreements because it allows borrowers to delay repaying the full amount of money they borrowed. Interest also creates an incentive for lenders to release money into circulation.

Credit is a contractual arrangement between a borrower and a lender in which the lender is pre-approved for a loan. The lender provides the borrower with something of value, and the borrower agrees to return that value to the lender at an agreed upon date. In most credit relationships, interest provides incentive for the lender to part with something of value and for the borrower to repay what they owe. Credit repayments can be made either in instalments (e.g., in-store credit) or on a revolving basis (e.g., credit card credit).

Similar to credit, a loan agreement involves a lender providing money, property or anything of value to a borrower. A loan agreement normally has terms agreed upon by both the lender and borrower, including how long the borrower has to repay the lender and how much interest the lender will charge the borrower.

Interest Rates

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Interest is stated as a rate (a percentage of the principal amount borrowed) to be charged for either an agreed or indefinite period of time that the money is on loan. The interest rate can be either fixed or variable. Fixed interest rates remain the same for either the entire duration of the loan term or for a specified period of the loan term, while variable interest rates can fluctuate over the loan term.

Three main factors affect interest rates. First, there is a risk that the borrower cannot or will not repay the money. The risk of lending to the federal government is not large (although even countries, or sovereign borrowers, have defaulted on loans), but it rises somewhat on loans to provinces and even more on loans to large companies. On loans to individuals, risk is often reduced by a mortgage on property or collateral (something valuable, such as a bond deposited with the lender as security). The lender can then seize the collateral if the loan is not repaid. Unsecured consumer loans carry a high risk ( see Consumer L​a​w), and therefore have high interest rates.

Second, risk increases the longer the money is loaned. The borrower's ability to repay money may not change much in a month or a year, but over 10 or 20 years it may change radically, as may the need of the lender for the use of their own money.

Third, inflat​ion affects the purchasing power of the money when it is repaid to the lender. For example, on a $100 loan at 5 per cent interest, the lender will lose money if inflation runs at 10 per cent per year because the $105 paid in principal and interest at the end of one year will buy only what about $95 would have bought when the loan was made. The inflation that must be taken into account, however, is not the inflation rate at the time the loan is made or over the year; it is the future rate, which can only be guessed by lender and borrower. If inflation is generally expected to drop, short-term loans may cost more in interest than long-term loans, because the greater risk of default on the longer-term loan is more than balanced by the hope of lower inflation.

In the 1970s and 1980s, economists found that uncertainty also affected interest rates. Real interest rates - that is, the stated rates minus the expected inflation rate - had risen above 8 per cent by 1990, because in a time of economic instability, lenders had attempted to protect themselves from uncertainty.

The general level of interest rates is also affected by the demand for borrowed money, which tends to rise and fall with the economy ( see Business Cycles). In times of ​recessi​​on, businesses and consumers are less interested in borrowing, and this tends to reduce the general level of rates. But with economic recovery, businesses want to expand and consumers want to buy on credit, and this increases the demand for loans. Since the financial service reforms of the 1980s and 1990s, increased loan demand has been met by creditors through the selling of debt in the form of asset-backed securities. This process is often referred to as securitization.

History of the Bank Rate in Canada

The Bank of ​Canada fixes the bank rate, which is the amount it charges for the relatively infrequent loans it makes to the chartered banks. Canada's central bank was formed by an Act of Parliament in 1934 to help the federal government better manage the national economy.

Until the First World War, almost all Canadian government borrowing took place outside of Canada, in the United Kingdom. The reliance on foreign loans resulted in a lot of volatility in the Canadian economy. After the war, the Canadian government and its chartered banks sought credit within the Canadian market. However, the switch to the Canadian market did not reduce economic volatility. Following the Great Depression, the Canadian government decided to form a central bank to help increase the money supply and generate "cheap money" - a loan, or credit, with a low interest rate. The belief that guided this policy was that cheap money from low bank and interest rates would result in full employment (the lowest possible unemployment rate).

The drive to provide full employment met a serious challenge in the late 1950s, when inflation, or a rise in prices, started to impact the Canadian economy. To confront inflation, Bank of Canada Governor James Coyne ordered a reduction in the Canadian money supply and raised the bank rate.

DID YOU KNOW?

The Bank of Ca​nada fixes the bank rate, which is the amount it charges for the relatively infrequent loans it makes to thechartered banks. The bank rate signals the direction in which the Bank of Canada wants interest rates to move. The Bank of Canada will raise the bank rate to try to reducein​flation, for example, or lower the bank rate to help curb deflation (a decline in money supply - the opposite of inflation).

During the 1970s, the bank rate was fixed at a certain percentage rate for periods that typically lasted for months and then changed by a Bank of Canada announcement. In 1975, Prime Minister Pierre Elliott Trudeau introduced the Anti-Inflation Board, which sought to control wage and price increases. Correspondingly, the Bank of Canada began to try to cut inflation by raising interest rates in 1978 through 1981. This move was based on the theory that with high interest rates, consumers would be unwilling to borrow for goods such as houses and cars, and businesses would be unwilling to invest; thus, a rise in interest rates would cut down the demand for goods and services, which would reduce the upward pressure on prices. This policy (the use of interest rates to cut inflation) culminated in 1981 when the bank rate rose above 21 per cent and the prime lending rate was 22.75 per cent.

Canadian rates might not have reached such levels had it not been for the rise in rates in the United States, where a similar monetarist policy was in effect ( see Mo​netary Policy). When American rates rise and Canadian rates do not follow, money tends to flow to the US as lenders seek the higher return on their loans. This outflow pushes the value of the Canadian dollar down relative to the value of other foreign currencies, such as the American dollar. Imported goods then cost more in Canadian dollars ( see Imports), and this tends to raise the inflation rate in Canada. One way to break the close connection between Canadian and American interest rates is to control the flow of money in and out of Canada, as was done during the Second World War by a system of exchange controls ( see Exchange Rates).

Overnight Rate

The overnight rate refers to the interest rate used by large ba​nks in the overnight market to lend and borrow from each other. In Canada, the Bank of Canada sets a target rate for the overnight rate, which it refers to as the policy interest rate. In March 1980, the Bank of Canada shifted to a system under which the bank rate was changed each week to match changes in the rate paid by the federal government to borrow money for 90 days by selling treasury bills. In February 1996, the Bank of Canada adopted a new approach. It began setting the bank rate at the upper limit on a one-half-percentage-point range (e.g., 0.75 per cent to 1.25 per cent) for overnight loans to financial institutions - over which it has more control than the rate on 90-day treasury bills. The range, or operating band, is fixed by the bank and is only adjusted when the bank wants a change in other short-term rates, such as for consumer and business loans. For example, the bank rate was changed five times in 1998. At the end of 1998, the bank rate was 5.25 per cent, which was the top of the 4.75 to 5.25 per cent operating band. Other lenders, usually, quickly match changes in the bank rate with increases or decreases in their prime rates, to which consumer and business loans are tied. In November 2000, the Bank of Canada announced that it planned to introduce eight fixed dates each year to announce changes to the overnight rate. Fixed announcements of possible interest rate changes ensure less speculation about a rate that affects not only large banks, but consumer loan and mortgage rates, as well as the exchange rate for the Canadian dollar.

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Interest refers to the amount of money that a borrower pays for money borrowed. Interest payments do not reduce the principal amount (the original amount of money borrowed). Interest is usually paid in increments. To calculate the money owed at each increment, a percentage rate or interest rate is set and agreed upon.

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What did you learn about your topic that surprised you the most?

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What did you learn about your topic that surprised you the most?

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We learned that the Bank of Canada interest rate will have a chain reaction and affect credit card interest rates and savings account interest rates.

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Provide a real-life example of how this topic is relevant or interesting for you.

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Provide a real-life example of how this topic is relevant or interesting for you.

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I will be buying a car soon, to ensure I get the best interest rate on my car loan I need to make sure I pay off all my credit cards on time and keep my credit score high.

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If you could pass on your knowledge to a family member or friend, whatdo you think is the most important thing to pass on?

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If you could pass on your knowledge to a family member or friend, whatdo you think is the most important thing to pass on?

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If I knew someone looking to buy a house I would encourage them to make the purchase while interest rates are this low.

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Interest Rates Likely to Stay low For a Generation - Video #1

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Interest Rates Likely to Stay low For a Generation - Video #1

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Stephen Poloz discusses the need for fiscal policy during the COVID-19 crisis. If fiscal policy does more to take the financial burden off monetary policy. These days fiscal policy is the main tool to control interest rates. In the long run declining interest will be something to worry about. Interest rates are likely to stay low for a generation.

We chose this video because it is from Business News Network which is a trustworthy source. One piece on information We found useful was that interest rates have been low other than in the 70's and 60's.

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Interest rates likely to stay low for a generation: Stephen Poloz

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Factors that Affect the Fluctuation of Interest Rates - Video #2

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Factors that Affect the Fluctuation of Interest Rates - Video #2

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This video briefly introduces what an interest rate is before explaining the factors that affect the fluctuation in them. This video is short and to the point and tells us the demand for credit, inflation, and the federal fund rate are the main factors that affect fluctuation in interest rates.
We decided to include this video because of the simplicity of the explanation, and the fact that the topic aligned perfectly with what we are describing; the factors that affect the fluctuation of interest rates.

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An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. In both cases it keeps the economy moving by encouraging people to borrow, to lend, and to spend. But prevailing interest rates are always changing, and different types of loans offer different interest rates. If you are a lender, a borrower, or both, it's important you understand the reasons for these changes and differences.​ They also have a heavy effect on the rare metals trade, including silver stocks.

Key Takeaways

Lenders and Borrowers

The money lender takes a risk that the borrower may not pay back the loan. Thus, interest provides a certain compensation for bearing risk. Coupled with the risk of default is the risk of inflation. When you lend money now, the prices of goods and services may go up by the time you are paid back, so your money's original purchasing power would decrease. Thus, interest protects against future rises in inflation. A lender such as a bank uses the interest to process account costs as well.

Borrowers pay interest because they must pay a price for gaining the ability to spend now, instead of having to wait years to save up enough money. For example, a person or family may take out a mortgage for a house for which they cannot presently pay in full, but the loan allows them to become homeowners now instead of far into the future.

Businesses also borrow for future profit. They may borrow now to buy equipment so they can begin earning those revenues today. Banks borrow to increase their activities, whether lending or investing and pay interest to clients for this service.

Interest can thus be considered a cost for one entity and income for another. It can represent the lost opportunity or opportunity cost of keeping your money as cash under your mattress as opposed to lending it. And if you borrow money, the interest you have to pay could be less than the cost of forgoing the opportunity of having access to the money in the present.

How Interest Rates are Determined

Supply and Demand

Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them.

An increase in the amount of money made available to borrowers increases the supply of credit. For example, when you open a bank account, you are lending money to the bank. Depending on the kind of account you open (a certificate of deposit will render a higher interest rate than a checking account, with which you can access the funds at any time), the bank can use that money for its business and investment activities. In other words, the bank can lend out that money to other customers. The more banks can lend, the more credit is available to the economy. And as the supply of credit increases, the price of borrowing (interest) decreases.

Credit available to the economy decreases as lenders decide to defer the repayment of their loans. For instance, when you choose to postpone paying this month's credit card bill until next month or even later, you are not only increasing the amount of interest you will have to pay but also decreasing the amount of credit available in the market. This, in turn, will increase the interest rates in the economy.

Inflation will also affect interest rate levels. The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future.

Government

The government has a say in how interest rates are affected. The U.S. Federal Reserve (the Fed) often makes announcements about how monetary policy will affect interest rates.

The federal funds rate, or the rate that institutions charge each other for extremely short-term loans, affects the interest rate that banks set on the money they lend. That rate then eventually trickles down into other short-term lending rates. The Fed influences these rates with "open market transactions," which is the buying or selling of previously issued U.S. securities. When the government buys more securities, banks are injected with more money than they can use for lending, and the interest rates decrease. When the government sells securities, money from the banks is drained for the transaction, rendering fewer funds at the banks' disposal for lending, forcing a rise in interest rates.﻿﻿

Types of Loans

Of the factors detailed above, supply and demand are, as we implied earlier, the primary forces behind interest rate levels. The interest rate for each different type of loan, however, depends on the credit risk, time, tax considerations (particularly in the U.S.), and convertibility of the particular loan.

Risk refers to the likelihood of the loan being repaid. A greater chance that the loan will not be repaid leads to higher interest rate levels. If, however, the loan is "secured," meaning there is some sort of collateral that the lender will acquire in case the loan is not paid back (i.e., such as a car or a house), the rate of interest will probably be lower. This is because the risk factor is accounted for by the collateral.

For government-issued debt securities, there is, of course, minimal risk because the borrower is the government. For this reason, and because the interest is tax-free, the rate on treasury securities tends to be relatively low.

Time is also a factor of risk. Long-term loans have a greater chance of not being repaid because there is more time for the adversity that leads to default. Also, the face value of a long-term loan, compared to that of a short-term loan, is more vulnerable to the effects of inflation. Therefore, the longer the borrower has to repay the loan, the more interest the lender should receive.

Finally, some loans that can be converted back into money quickly will have little if any loss on the principal loaned out. These loans usually carry relatively lower interest rates.

The Bottom Line

As interest rates are a significant factor of the income you can earn by lending money, of bond pricing and of the amount you will have to pay to borrow money, it is important that you understand how prevailing interest rates change: primarily by the forces of supply and demand, which are also affected by inflation and monetary policy. Of course, when you are deciding whether to invest in a debt security, it is important to understand how its characteristics determine what kind of interest rate you can receive.

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What Are the Forces Behind Interest Rates and What Causes Them to Rise?

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An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. In both cases it keeps the economy moving by encouraging people to borrow, to lend, and to spend.

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Bank of Canada and how they affect interest rates - Website #3

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Bank of Canada and how they affect interest rates - Website #3

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This article explains how a policy interest rate in Canada is the amount of interest the Bank of Canada and other Canadian banks charge each other for overnight loans. It goes on to state this affects us because if the bank of Canada changes their interest rate for other banks it sets of a chain reaction and determines what interest rates the bank will now charge on credit cards overdue and how much it will give out for savings accounts.
Something to take away from this article is that it is next to impossible to predict a change in interest rates because of the bank but to keep an eye on them. this is beneficial because if you see them inflate or deflate you can sign up for a savings account accordingly or re-evaluate your mortgage.

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As the old saying goes, "It takes money to make money." (There is also an old saying that goes, "That's showbiz, baby!" but that's not what this article is about.)

When you put money away, you want that money to grow by earning interest. And when you borrow money from the bank, be it short term like on your credit card or long term like on your mortgage, you know that the financial institution that lent it to you is earning money off of you, usually in the form of interest.

So how does the money make money? Maybe you've read about how to pay off your credit debt, and how to pick the perfect savings account. Both are matters of looking at interest rates and your financial goals. But, interest...how does it work? And how do interest rates affect your financial health?

Here's a no-nonsense overview on how interest rates are set, and what the fluctuations mean.

Let's start with the Bank of Canada.

The Bank of Canada is a crown corporation, which means it's owned by Canadians (hey, that's us!). While the Bank is technically the property of the Federal Government, it operates with a large degree of independence from our elected officials. (This independence puts a check on government power to safeguard our economy and financial system from political exploitation.)

The Bank of Canada exists to regulate and monitor the Canadian financial system, and to help keep the rate of inflation stable and low so that our national economy can grow rather than shrink. It acts as a research institution, surveilling how many economic factors affect the value of Canadian money, and sets the policy interest rate.

"The Bank of Canada exists to regulate and monitor the Canadian financial system, and to help keep the rate of inflation stable and low so that our national economy can grow rather than shrink."

What is the policy interest rate?

So this is just a tiny bit complicated. The policy interest rate is also called the 'Overnight Rate,' because it is the interest that the major Canadian banks charge each other for overnight loans.

Let's back up a bit. For the big Canadian banks to be able to cover the daily transactions of their customers (including individuals, businesses, and investment funds), they need to have access to large and fluctuating amounts of money. In order to have that access, the large banks lend each other large amounts of money electronically overnight, and repay the money at the end of the next day's transactions. This lending and repaying is called the overnight market.

The overnight rate, or policy interest rate, is the rate of interest on these loans between the major banking institutions.

Okay, but I'm not a bank? What does the policy interest rate have to do with me?

When the Bank of Canada lowers or raises the overnight rate, it factors into the way commercial banks apply interest on credit they've extended (like, say, a credit card, mortgage or line of credit), and what they agree to pay as interest on their savings products (for instance, a high interest savings account).

So a lowering of the policy interest rate typically means the banks will change their interest terms-for both credit they're lending out and interest they pay on savings and investments.

In general, when the Bank of Canada changes the policy interest rate, it sets off a chain reaction that affects lending rates from every bank. Each bank determines their own "prime lending rate," which is itself primarily influenced by the Bank of Canada's policy interest rate.

Each commercial bank uses their prime rate as the building block for many different lending services. But you probably, like most consumers, think of the prime rate as being significant to mortgages specifically.

Okay, but why is a higher interest rate good and a lower one bad?

Truthfully, it depends on where you're at in life.

When the interest rate takes a dip, as it did after the arrival of COVID-19 in 2020 or the sub-prime mortgage crash in 2008, it generally makes debt less expensive and savings less lucrative.

So if you have a variable rate mortgage, the lower rate means you'll be paying less in interest. The same goes if you've taken out a Home Equity Line of Credit.

A lower policy interest rate usually means the banks are setting a lower prime rate on mortgages, so if you're looking to buy property it's advantageous to do so while the rate is low, in part because you'll be better positioned for a mortgage stress test.

However, a lower rate can mean your savings take a ding. Especially if you're retired or living off a fixed income from a savings fund, you might feel a little crunch. If your fund is set up to be invested with guaranteed interest, as with a GIC or HISA, the rate of return on your investment will take a dip.

That said, if you own property, the lowered mortgage rate will likely protect the growing value of that property, because the lowered mortgage rate helps stimulate market demand.

What other factors affect the way commercial banks do interest?

Commercial banks set interest rates for both credit and savings products in a way that sets the bank up to turn a profit. This is why, duh, the rate of interest a bank pays you on a savings account is likely to be lower than the interest rate that same bank collects from you on a line of credit. (This also might explain why many commercial banks are often trying to maintain minimum account balances, get you to pay various kinds of account fees, and sell you more credit...)

The Bank of Canada's policy rate is one of the major external forces that commercial banks use to determine how interest is set.

Other major external factors include things like:

What the bank has in assets-if it has extended more credit than it can reasonably cover, for example.

The price value of those assets-for example, does the mortgage on a property match the current price valuation of that property?

The global currency exchange rates, or the strength of the Canadian dollar.

The expectations commercial banks and consumers have about the economic outlook. Like a vibe check, but with spreadsheets.

Typically, the Bank of Canada adjusts the policy interest rate on eight predetermined dates throughout the year. When the Bank of Canada decides to make an unannounced change, like in March 2020, it can feel scary and confusing. It's normal to feel anxiety when things change suddenly. In general, the Bank of Canada is acting to create a sense of long term economic stability for Canadians.

That's the long term. In the short term, arming yourself with knowledge about how interest works, how to manage debt, and how to make the right decision about what to do with your savings will empower you to take control of your financial health.

And, hey, just saying, KOHO offers in-house financial coaching.

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How Do Interest Rates Work In Canada? Interest Rates & Prime Rates Overview

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Changing interest rates in Canada can affect your financial health. What is a good interest rate? What are prime rates and the overnight rate? Find out how interest rates work in Canada and how you can get your money to make money by avoiding high interest rates on loans such a credit cards.

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What Would NEGATIVE INTEREST RATES Mean For Canadians | What They Are And How The Work - Video #3

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What Would NEGATIVE INTEREST RATES Mean For Canadians | What They Are And How The Work - Video #3

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This video discusses negative interest rates. Many other countries are utilizing negative interest rates to boost the economy. These countries are testing having negative interest rates to see if they work out. You would have to pay  to keep money in a savings account, and would earn money when borrowing. Having negative interest rates will also increase the amount of debt, a category where Canada is already one of the worst countries in the world.
We chose this video because it describes negative interest rates in an easy to understand way. One piece of information I found useful was that negative interest rates are possibly a tool to help boost a suffering economy.

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What Would NEGATIVE INTEREST RATES Mean For Canadians | What They Are And How The Work

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How debt to income ratio affects interest rates - Website #4

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How debt to income ratio affects interest rates - Website #4

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This article outlines the importance of having a higher monthly income than all your debt specifically your mortgage payments should you be looking to buy a home. While lenders look at credit scores they also consider how much you make monthly, in comparison to your monthly payments. Things included in your debt to income ratio is credit card payments, installment loan payments, housing, and student loans.
We chose this article because it is a very relevant factor contributing to interest fluctuating. some things that stand out in this article are the compensating factors to mention to a lender should you have a poor debt to income ratio. These Include liquid assets, a high credit score, and stable employment history.

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You apply for a mortgage and your goal is to get the lowest interest rate possible. You aren't alone. You probably focus a lot of effort on your credit score. You figure that's the one thing lenders use to decide your interest rate. You are partially right, but there are a few other factors they consider including your debt-to-income ratio.

Compare Offers from Several Mortgage Lenders.

Lenders look at the big picture when qualifying you for a loan. They want to know that you are a good risk all around. You could have the best credit score but still be in over your head in debt. While your credit score says that you aren't a high risk, your debt-to-income ratio says otherwise.

Let's look at how your DTI can affect your interest rate.

The Housing Ratio and Your Interest Rate

Your housing ratio is the comparison of your monthly housing payment to your gross monthly income. The higher the housing ratio becomes, the lower the likelihood of you paying the mortgage on time becomes. If you need a loan that puts your housing ratio close to the program's limits, you can expect the lender to give you a higher interest rate.

Lenders charge the higher interest rate to make up for your inability to pay the mortgage. They aren't saying that you can't pay the mortgage. What the higher interest rate says is that the lender is protecting themselves should you default. With a higher interest rate, the lender makes money when you do pay your mortgage.

The Total Debt-to-Income Ratio and Your Interest Rate

Your total debt-to-income ratio is the comparison of all of your monthly debts to your gross monthly income. Your total DTI includes things like:

Minimum credit card payments

Installment loan payments

Any other housing payments you have

Student loans

The total DTI lets lenders know how much of your income is already accounted for each month. If the number is too high, (over 43%) you may not get approved. If it's below, but close to 43%, you can count on a higher interest rate because the lender is taking a large risk by giving you a loan.

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Can a Low Debt-to-Income Ratio Help?

A low debt-to-income ratio could have the opposite effect on your interest rate. If your DTI is low enough (either housing or total), you may get a lower interest rate. Lenders prefer borrowers that pose little to no risk of default on their mortgage.

Does this mean that if you have a low DTI that you will automatically get a low interest rate? Unfortunately, it doesn't mean that. Lenders look at the big picture. They want to know what all of your factors look like when combined. For example, do you have a high credit score and a low debt ratio? If so, you stand a good chance to get a lower rate. If you have a low credit score and a low debt ratio, you may not have that good fortune since your low credit score signifies that you may be a credit risk.

Compensating Factors Help

No matter what your debt-to-income ratio is, you can try to offset it with some compensating factors. These are factors that let the lender know that you aren't as high of a risk of default as they thought. Compensating factors include:

Reserves on hand - If you have liquid assets that you can go to should you have trouble paying your mortgage; the lender may count them as reserves. They measure the money that you have based on the number of months of mortgage payments it would cover.

High credit score - We touched on this topic already, but it's worth mentioning again. A high credit score shows lenders that you are a good risk. In other words, it shows them that you pay your bills on time.

Stable employment history - You should have a two-year employment history with the same employer whenever you apply for a new mortgage. While it's not necessary, it's another way to show lenders that you are stable and reliable. If you switch jobs often, you pose a higher risk for lenders because your income becomes unpredictable.

The bottom line is if you want the lowest interest rate possible, you need to make all of your qualifying factors look good. If you have a low debt-to-income ratio, you put yourself in a great position to get a low rate. It helps if you also have a high credit score, money as reserves, and a stable employment history.

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How Does Your Debt-to-Income Ratio Affect Your Interest Rate? - Connect Rates

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You apply for a mortgage and your goal is to get the lowest interest rate possible. You aren't alone. You probably focus a lot of effort on your credit score. You figure that's the one thing lenders use to decide your interest rate.

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Bank of Canada Cuts Key Interest Rate - Video #4

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Bank of Canada Cuts Key Interest Rate - Video #4

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This video is from a news segment after the news had broken that the Bank of Canada was cutting the key interest rate. In this video, the news station's business host describes what the rate was cut to, why it was cut, and what this means.
We decided to include this video because it shows that interest rates do fluctuate, even if it doesn't happen often. Also because this video touches on some of the factors we have mentioned elsewhere on this page.

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Bank of Canada cuts key interest rate to 1.25%