First BoC rate drop of 2025: Who wins and who loses when the Bank of Canada lowers its interest rates?

Winners: Who benefits from lower interest rates?

Bird’s Eye View: Borrowers and economic activity see immediate gains

One of the bigger winners from the January 29, 2025 BoC rate announcement are borrowers — particularly Canadians with variable-rate mortgages and people with personal, car or student loans tied to the prime rate. With a rate drop, Canadians carrying debt will see their monthly payments decrease almost immediately/stay the same.

As Tyler Thielmann, CEO of Spring Financial, explained: “Variable rate debt holders should see an immediate change in their interest costs, leaving more money in their pockets each month.”

Similarly, home equity lines of credit (HELOCs) also benefit from reduced borrowing costs, providing relief to Canadians who may have used their homes to finance renovations or other major expenses.

Businesses, too, gain advantages as business owners can access cheaper borrowing, which helps foster growth and encourages investment in expansions, hiring, and innovation.

Experts like the Chief Economist at BMO, Douglas Porter, note that the rate cuts reflect a broader strategy to support economic recovery. "A significant decline in inflation, paired with easing borrowing costs, is expected to stimulate economic activity,” Porter remarked, adding that consumer spending could be bolstered as Canadians feel less financial strain.

Reader Tip: If you carry variable-rate debt, consider refinancing to lock in lower rates while they last.

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Losers: Who is hurt by lower interest rates?

Bird’s Eye View: Savers and long-term planners face challenges

While borrowers celebrate, savers are left grappling with the downside of lower interest rates.

Canadians who rely on fixed-income investments like Guaranteed Investment Certificates (GICs) or high-interest savings accounts (HISAs) will see reduced returns, making it harder to grow wealth securely. Rachel Siu, head of Canadian fixed-income strategy at BlackRock, cautions that declining rates often diminish the purchasing power of savings over time if inflation creeps back up.

Retirees, in particular, are vulnerable. Those relying on income from fixed-rate investments may need to reconsider their financial strategies to ensure they can sustain their lifestyles.

“Once the actual inflation has been factored into nominal interest rates, borrowers start to lose, while savers might feel the squeeze,” notes David Gray, a professor of economics at the University of Ottawa.

Reader Tip: To offset reduced yields, explore investment products that hedge against inflation, such as inflation-protected securities, or use hybrid banking solutions like KOHO to maximize savings flexibility.

Why interest rates change: Balancing growth and inflation

The BoC uses interest rate adjustments to influence economic activity and inflation. With inflation now at 1.8% — significantly down from the rates seen in 2024 — the central bank sees room to stimulate growth without risking runaway price increases.

However, this balancing act isn’t without risks. Economists like Frances Donald, chief economist at RBC, warn that external challenges, including US tariffs and global trade uncertainty, could still pressure Canada’s economy, making further rate cuts a double-edged sword.

James Orlando, an economist with TD, emphasizes the cautious nature of the BoC’s approach: “Given where interest rates are in Canada, we think the BoC can go slower with its cuts.” This careful strategy reflects the complexity of stimulating growth while avoiding excess borrowing.

Reader Tip: Stay informed about inflation reports and economic forecasts to anticipate future rate changes.

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First-time homebuyers: Navigating rate changes

For first-time homebuyers, lower rates can help improve affordability, but not dramatically in high-cost housing markets.

Thielmann advises buyers to avoid trying to “time the market” based on minor rate changes. Instead, focus on what you can afford today and ensure your financial plan includes a buffer for potential future rate increases — just in case.

Tools like Tax-Free Savings Accounts (TFSAs) are invaluable for saving toward a down payment. These accounts allow Canadians to grow their savings tax-free, making them an attractive option for young buyers seeking to navigate high housing costs.

Another great option is the First-Time Home Savers Account (FHSA). Structured in a similar fashion to the TFSA, an FHSA lets you save for a home and avoid paying tax on earnings generated in the account. This can mean more money in the bank for your down payment.

Reader Tip: Open a TFSA or FHSA to maximize tax-free growth and expedite your savings goals.

Broader implications: Stimulating growth or exacerbating debt?

While rate cuts encourage spending and investment, they also carry risks. The availability of cheap credit may lead to over-leveraging, particularly as Canadians already carry high levels of household debt. Increased reliance on credit could create financial vulnerabilities if rates rise again or if inflation accelerates — adding extra pressure to household budgets.

Still, this recent rate cut will help. Tiago Figueiredo of Desjardins predicts this recent rate cut will provide a cushion for Canadians facing mortgage renewals, alleviating some of the financial pressure from elevated borrowing costs.

Reader Tip: Maintain a healthy debt-to-income ratio and focus on paying down high-interest debt to protect against future rate increases.

6 practical tips for adapting to rate changes

To help, here are six tips to help you adapt to rate changes:

1. Adjusting your financial strategy to align with changing rates.
2. Diversify your investment portfolio to mitigate risk and ensure your savings continue to grow.
3. Revisit your budget to account for potential changes in borrowing or savings rates.
4. Consult a financial advisor to get tailored advice for navigating these shifts.
5. Explore flexible savings accounts, particularly accounts that offer cash back or rebates.
6. Consider refinancing fixed-rate debts for greater financial resilience.

Bottom line

Interest rate changes create both opportunities and challenges for Canadians. While borrowers and businesses benefit from cheaper credit, savers and retirees face diminishing returns.

Understanding these dynamics and proactively managing your finances can help you navigate rate shifts effectively. As the Bank of Canada continues to balance inflation and growth, staying informed and adaptable will remain key to financial success in 2025 and beyond.

— with files from David Saric