GEEM - Skills and Knowledge

F1.6 Compare interest rates and fees for different accounts and loans offered by various financial institutions, and determine the best option for different scenarios.

Skill: Comparing Interest Rates and Fees on Various Accounts and Loans Offered by Different Banking Institutions

The concept of an interest rate may seem very simple. It represents a percentage of a capital and is added to that capital. However, in reality, this concept can be very complex to understand and integrate into a budget. Two types of interest rates are available, fixed and variable.

Variable and Fixed Interest Rates

As the name implies, fixed interest rates remain the same throughout the life of the loan, usually 1 to 5 years. Variable interest rates can change depending on the prime interest rate set by the Bank of Canada. Fixed interest rates offer greater stability.

The fixed rate is suitable if:

the person prefers fixed monthly payments
there is no room for manoeuvre in the budget
it is likely that the prime rate will increase during the repayment of the loan

The variable rate is suitable if :

the person can afford an increase in monthly payments
it is likely that the prime rate may drop during the repayment of the loan
unexpected market changes do not cause stress and anxiety to the individual

As students learn about interest, they will need to develop criteria for comparing interest rates offered by different financial institutions, different types of bank accounts and different types of investments or loans. Various factors will influence choice, ranging from the value of the interest rate to the type of interest rate (either fixed or variable) and the period of the investment or loan (amortization period). Students will use technological tools, such as online interest calculators.

The following is a list of questions that could be asked of intermediate students to help them learn more about interest rates.

In what situations is it better to get a fixed rate mortgage? Explain your reasoning.
How does a financial institution determine the interest rate?

Knowledge: Types of Bank Accounts

Savings Account	A type of account that earns interest on money. This type of account often has a low monthly fee, but a higher user fee for each transaction made.
Chequing Account	A type of account that pays very low interest. This type of account often has higher monthly fees and allows for monthly transactions. The number of transactions and fees vary by account type and financial institution.
Investment Account	A type of account that earns varying amounts of interest depending on the type of investment. This type of account often has a monthly fee in addition to the transaction fee.