Bank of Canada cuts key interest rate to 2.25%: What it means for loans
The Bank of Canada announced today that it has cut its key overnight rate by 25 basis points to 2.25%, marking the second consecutive reduction. The Bank Rate now stands at 2.5% and the deposit rate at 2.2%.
The central bank cited a weaker economic outlook and persistent uncertainty tied to U.S. trade actions as key factors behind today’s decision. While most of the attention will focus on the impact on variable mortgage rates, today’s announcement also affects Canadians with personal loans, particularly those with variable rates. Since banks adjust their prime lending rate in response to the Bank of Canada’s move, borrowers with variable-rate loans will soon see their interest costs decline.
What the Bank of Canada rate cut means for loans
“When the Bank of Canada adjusts its policy rate, it triggers changes to the prime rate set by major banks. For Canadians with variable-rate personal loans, this means their interest costs will be impacted,” says Natasha Macmillan, Senior Business Director of Everyday Banking at Ratehub.ca.
If you already have a variable-rate personal loan, your interest rate will automatically decrease once your lender updates its prime rate. While the change in your monthly payment may seem small, those savings add up over the course of your loan term.
For borrowers with fixed-rate personal loans, your payments and rate will remain the same until renewal. When your term ends, compare your lender’s new offers to see whether switching to a variable rate could save you money - or if a fixed rate is still the better fit for your budget and risk tolerance.
“It's important to compare both fixed and variable options to determine which aligns with your risk tolerance and timeline. Variable rates offer flexibility but come with uncertainty, while fixed rates provide payment certainty,” Macmillan adds.
How loans and the Bank of Canada are connected
Personal loans generally fall into two categories: fixed-rate and variable-rate. The type you choose determines how quickly you’ll feel the effects of a rate change.
A variable-rate personal loan is directly tied to a lender’s prime rate, which moves in response to the Bank of Canada’s overnight rate. When the Bank changes its policy rate, lenders typically adjust their prime rate within a few days, and borrowers with variable-rate loans see their interest rate change accordingly.
Most variable-rate loans have consistent monthly payments, but the mix of interest and principal within those payments shifts as rates move. When rates fall, more of each payment goes toward paying down the principal faster; when rates rise, a larger portion covers interest.
Fixed-rate loans, on the other hand, are locked in for the length of the term. Once the term ends, renewal or new-loan rates will reflect the Bank of Canada’s latest policy moves, bond yields, and market expectations. Even if you have a fixed rate now, watching rate announcements can help you anticipate what to expect if and when it’s time to renew.
“As household debt continues to rise, many Canadians are exploring personal loan options to consolidate higher-interest debt or manage cost-of-living pressures,” says Macmillan. “If rates are declining, it could be a good opportunity to secure a personal loan, but it’s also important to evaluate several key factors, including credit score, loan amount, term, and overall affordability.”
What this means for other banking products and investments
While the Bank of Canada’s rate cut is good news for borrowers, it has different implications for savers and investors. Because the prime rate moves in tandem with the Bank of Canada’s policy rate, borrowing costs are also declining for products such as lines of credit, HELOCs, and car loans.
On the other hand, returns on high-interest savings accounts and guaranteed investment certificates (GICs) are expected to dip slightly in the coming weeks. Even so, these products continue to offer stability and predictable returns, making them a solid choice for Canadians seeking safety and consistency in an uncertain market environment. If you’ve been considering a GIC, now may be a good time to lock in a higher rate before financial institutions adjust their offerings in response to the Bank of Canada’s cut.
The Bank of Canada’s next rate announcement is scheduled for December 10, 2025, with its next full Monetary Policy Report due on January 28, 2026. In the meantime, financial institutions are expected to adjust their prime rates in the days ahead, and borrowers with variable-rate products should see those changes reflected soon after.
If you are considering a personal loan, Ratehub.ca’s Loanfinder can help you compare options and find the right fit for your budget and goals.
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Kyla Friel, Content Specialist
Kyla Friel is a content specialist at Ratehub.ca with a background in research-driven content marketing. She’s worked across B2B and consumer spaces, combining SEO knowledge with a passion for clear, engaging writing. She enjoys diving into complex topics and making them accessible to everyday readers.