When you borrow money, the interest rate is what you pay for using that money - shown as a percentage of your loan. Higher rates mean you pay back more.
For savers, the interest rate shows how much you'll earn on your money, again as a percentage. Higher savings rates mean more money in your pocket.
Even small rate changes can make a big difference. That's why it's worth watching if rates go up, down, or stay put.
Understanding interest rates
Wondering how interest rates work and what they mean for your investments? Here's the simple breakdown.
How interest rates affect investors
Interest rates are a hot topic these days, for good reason. In 2025, many of us felt the pinch when rates went up—hello, bigger mortgage payments. But rates don't just affect your loans—they also shake up your investments.
Just as it helps to know how rates change your monthly budget, understanding their impact on your portfolio matters too.
What are interest rates?
Interest rates are what borrowers pay lenders for using their money, shown as a yearly percentage. Borrow $100 at 10% interest, and you'll owe an extra $10 after a year. Rates change based on who's borrowing, who's lending, for how long, and things like inflation and what the central bank decides.
You'll see interest rates everywhere—on credit cards, mortgages, and student loans—but investors mostly watch these:
Policy rate
When someone says "rates went up by 0.25%," they're usually talking about the policy rate (or overnight lending rate). The Bank of Canada sets this one.
Prime rate
The prime rate is what banks charge their best customers for things like lines of credit.
With income investments, you become the lender. Buy a bond or GIC, or put money in a high-interest savings account, and you're lending money to that bank or company, who pays you interest for using your cash.
Types of interest rates
Interest rates come in different flavours, and each loan spells out how interest builds up and gets paid back:
Simple vs. compound
Simple interest means you earn money just on your original deposit. Bonds and short-term GICs usually work this way. Compound interest (found in multi-year GICs and savings accounts) means you earn interest on your interest—not just on what you first put in.
Fixed vs. variable
Fixed rates stay the same throughout your loan term. Variable rates can go up or down, usually following the Bank of Canada's overnight rate.
How are interest rates determined?
Interest rates aren't random. Central banks set the policy rate—what they charge commercial banks—based on how the economy is doing and inflation levels. If they want to boost the economy, they might lower rates so it's cheaper for everyone to borrow. Banks then follow the central bank's lead when setting their own rates for customers.
Inflation and interest rates
Many things affect interest rates, but inflation—how fast prices go up—is one of the biggest factors. Central banks use interest rates to help control inflation. The Bank of Canada can influence how we spend money by adjusting rates. Higher rates usually mean less borrowing and spending. When demand drops, prices stop climbing so fast, which helps slow inflation. Lower rates tend to encourage more borrowing and spending.
How do interest rates affect investors?
Higher rates might hurt if you have a variable mortgage or need to borrow, but they can actually help some of your investments. Here's what happens to different investments when rates go up:
Savings accounts
High-interest savings accounts usually have variable rates, so when rates rise, you earn more on your money. But watch out—these accounts might pay less than the inflation rate, which means you could still be losing purchasing power.
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GICs
When interest rates climb, GICs look more attractive. After years of low returns, GICs became competitive again in 2023, with rates over 3%. If you already have an older GIC, though, you might be stuck with lower rates since many can't be cashed in early. A five-year GIC from when rates were low won't match what new GICs offer today.
Bonds and bond funds
Bonds issued today pay higher interest than those from a year ago when rates were lower. Many Canadians own bonds through mutual funds or ETFs. When rates rise, the price of older, lower-yielding bonds in these funds drops, causing a loss for investors. You can also buy real-return bonds that have more stable prices and interest rates that adjust with the market.
Stocks and equity funds
Rising rates might help your fixed-income investments but can hurt your stocks—at least for a while. Companies face higher borrowing costs, which can cut into profits and what they pay shareholders. Also, as bonds and GICs become more attractive, some investors move money from stocks to fixed income, meaning fewer buyers for shares. Different sectors react differently to rate changes, so it helps to research how specific industries have performed during similar rate environments in the past.
Dealing with a rise in interest rates
When central banks start changing rates, it's worth keeping a closer eye on your investments. Rising or falling rates can shake up your portfolio in different ways. Here's what to keep in mind when rates are climbing:
Impact on fixed income
When rates go up, bond prices drop. It's simple—new bonds pay higher interest, making older, lower-paying bonds less attractive. But there's good news too. Bonds, GICs and other interest-paying investments generally offer better returns for their risk level when rates rise.
Impact on stocks
Stocks don't react to rate changes the same way bonds do, but they're not immune either. As fixed-income investments start paying more, some investors shift money from stocks to bonds or GICs. This can push stock prices down as fewer people are buying shares.
What's a high interest rate and what's a low one?
What counts as high or low depends on what you're borrowing for. Credit cards usually have high rates—often double digits—making them pretty expensive debt. Mortgages normally have much lower rates. When mortgage rates drop well below what they've been historically, people call that low. Auto loans and personal loans sit somewhere in the middle, with your credit score and how long you're borrowing for affecting what rate you get.
What is an APR?
APR stands for Annual Percentage Rate. It's the yearly cost of your loan or credit card including both the interest rate and any extra fees. It's not just a monthly rate—it shows what you'll pay over a full year, shown as a percentage.
The APR helps you compare different loans or credit cards more easily. Credit card companies must tell you the APR before giving you a card and show it on your monthly statements.
What this means for your money
Interest rates aren't just numbers—they're worth watching because they affect your money in real ways. When rates shift, your mortgage costs change, but so do your investment returns.
Smart investors pay attention to rate trends. Higher rates can hurt borrowers but help savers. They can push bond prices down but boost their yields. They might slow down some stocks but create buying opportunities in others.
The key is balance. A mix of different investments helps protect your money no matter which way rates move. And remember—what counts as a "high" or "low" rate changes with time and economic conditions.
By understanding how interest rates work, you can make better choices with your money. It might not be the most exciting topic, but it's one that affects your wallet every day.