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Effect of rising interest rates on investing

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Everything is getting more expensive. It’s a refrain you hear constantly these days as rising interest rates and inflation affects everything from the price of groceries to mortgage payments. 

With inflation on the rise and Canadian 
interest rates the highest they’ve been in decades, getting a handle on one’s finances is more important than ever today. While rising interest rates are meant to combat inflation and reduce spending and borrowing, where does that leave potential homeowners and those looking to invest? What do rising interest rates mean for borrowing money, and how will rising rates impact the economy? 


As talk of a looming recession increases, investment strategies can seem overwhelming given the uncertainty in the economy. Below we’ll look at best practices for investing during rising interest rates, examine how a looming recession may affect the economy, and provide a framework for those debating whether to invest in these unpredictable times. 

How Rising Interest Rates Affect Borrowing

At the time of this writing, the current Prime Rate in Canada sits at 6.7%, more than double what the rate was for most of 2022. The Prime Rate is used to determine the interest rate in the country for a variety of loans, from variable-rate mortgages to car loans to the interest rates on certain credit cards. If you are looking to borrow money for any reason, the effects of interest rates will impact your budget and may affect your ability to borrow at all depending on your overall financial picture.


If you are looking for a loan, you will likely be run through a financial stress test exercise, which tests to see if you will still be able to repay your loan given rising interest rates and the possibility of a recession.


In essence, borrowing is much more expensive now than it has been for many years. That shouldn’t entirely dissuade you from opening the business you’ve been working towards or buying a home that you’ve been saving for, but it does mean you will need to re-examine your financial reality given the current high-interest rates. Ultimately, you and your lender will need to assess if your plans are still feasible given the current interest rates and determine if the amount of your loan repayments are within your budget. 

Investment Tips Amidst Rising Interest Rate

Investing during rising interest rates is tricky; interest rates are rising to curb inflation by hoping people spend less, not more. That said, below are a few recommendations for those looking to invest in this turbulent time.

Guaranteed Investment Certificates (GICs)

Guaranteed Investment Certificates (GICs) are one of the most secure ways to invest. With a GIC you are shown the interest rate before you commit to a term and the investment is locked in for a fixed period, usually ranging from 1 to 5-year plans. Generally, longer-term GICs will offer the highest interest rates.

GICs are best for investors who can lock away their funds for the full term. Most GICs will charge a penalty for withdrawing your funds early, although cashable or redeemable GICs are another option if you are wary of committing to a full term (cashable GICs often offer a lower rate of return, however).

GICs are offered in Registered or Non-Registered varieties. Registered GICs earn tax-free interest, so you can keep 100% of your earnings without being taxed on your funds. Non-Registered GICs are taxable, so your earnings will be taxed at the end of the year.

EQ Bank, the digital bank of Equitable Bank, is currently offering a fixed return rate of 5% on 1-year Non-Registered GICs or 4.20% on Registered GICs (with a 5-year term). Both options are secure ways to invest amid rising interest rates, as your rate of return is guaranteed for the length of your term.


With the stock market on a downturn and a potential recession looming, bonds are another secure option for investors at the moment. A bond is a loan between an entity (a government or company) and an investor that can be traded on the market. A bond will always pay out (with interest) unless the organization defaults, which is very rare for these entities. Various types of bonds are available including Municipal Bonds, Corporate Bonds, and High-Yield bonds, which offer a greater interest rate but are riskier as they are issued by organizations with lower credit scores.

You can purchase bonds directly from the institution offering them (through a broker) or through a trading platform like Questtrade, which offers commission-free bonds. There are many factors to consider when purchasing bonds, from the type of bond to the coupon rate (the interest you will earn) to the maturity date.

Generally, bonds with higher investment grade offer a lower rate of return, but they are the most secure option. Given the uncertainty in today’s marketplace, high investment grade bonds are a smart and safe investment option.


Tax-Free Savings Accounts (TFSAs) may not offer the highest rate of return, but they can be beneficial on two fronts. You can open a TFSA through your bank or through robo-adviser services like Wealthsimple, where you can open an account with as little as $1.

With a TFSA, you can select the types of industries you want to invest in, or have a robo-advisor automatically invest on your behalf (with your initial input). The money earned on your investments is tax-free, but the safest bet in uncertain times is to stick with low-risk investments, which your advisor can steer you towards.  


Perhaps the least flashy option on this list, a Registered Retirement Savings Plan (RRSP) is another option to help you save during rocky financial periods.

Funds you add to your RRSP help bring down the taxable income you pay on your taxes each year, saving you money at tax time while also putting money away for your retirement. Even small amounts deposited on a weekly or monthly basis can quickly add up over time. First-time homebuyers in Canada can also take out up to $35,000 tax-free from their RRSP to use as a down payment for a home, a savings strategy that can bring you closer to that first home purchase.

Is a Recession on the Way?

Many business owners and financial advisory firms like Deloitte believe that a recession is on the way in Canada. 


A recession is a slowdown of economic activity tied to a country’s Gross Domestic Product (GDP). With high-interest rates causing consumers to be more careful with their spending, it may be only a matter of time before Canada hits an economic recession. As of the time of this writing, the consensus is that Canada is due for a moderate recession, which may be alleviated if inflation and interest rates both cool down. 


A recession can affect the performance of businesses and the job market at large; in the 2008 recession, Canada posted 400,000 job losses in a single year according to Statistics Canada. 

Investing on a Tight Budget

If a recession is on the way, how does that affect investment during a recession? While it’s impossible to predict how long a potential recession may last and its full effect on the economy, those on a tight budget should be prudent with their investment plans. 


If money is tight but you still want to plan for the future, GICs or Bonds are secure options with a guaranteed rate of return. Contributing to a TFSA and/or an RRSP are additional investment tools that can be low-risk and also help alleviate your tax bill each spring. 


However, if you are carrying debt heading into a recession (especially if you are on a variable interest rate credit card), you will also want to consider how much debt you want to pay down vs. how much to invest ahead of a recession. 

Final Thoughts

Rising interest rates and the threat of a possible recession shouldn’t necessarily stop you from investing if you can withstand further rate hikes and an uncertain marketplace. 

If you prefer more secure investment options, GICs and Bonds are a low-risk way to invest with a guaranteed return and have always been reliable investment tactics during increased interest rate periods. 

Frequently Asked Questions

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