As of September 2024, the prime rate in Canada currently stands at 6.45%. The prime rate in Canada is the base rate set by Canadian financial institutions to determine the variable interest rates they can charge on lending products, such as mortgages and loans.
It is usually based on the Bank of Canada’s overnight rate, so when the Bank of Canada changes its overnight rate, lenders adjust their prime rates accordingly. The prime rate is usually the driving force behind variable loans and lines of credit, including variable-rate mortgages.
So, if you’re getting a new line of credit or a mortgage with a variable rate, you need to watch out for the current prime rate to determine how much interest you’ll pay over time, in addition to repaying the principal amount you borrowed.
In this blog post, we will provide a comprehensive overview of the prime rate, how it’s established, and its implications for borrowers and savers in Canada.
What is Prime Rate in Canada?
The prime rate in Canada plays a pivotal role in the financial landscape, acting as a base interest rate set by the Bank of Canada. This rate forms the foundation upon which banks establish the interest rates for their loans.
For variable or floating-rate loans in Canada, the prime rate is a key determinant. Lenders use this rate as the baseline for calculating the margin on their loans. When the Bank of Canada sets the interest rates, it doesn’t exercise direct control over individual banks. Instead, the specific bank through which you secure your loan or line of credit determines this rate.
This prime rate holds significant implications for the broader economy, as it directly influences interest rates on variable-rate loans and lines of credit. During its regular monetary policy framework meetings, the Bank of Canada designates the prime rate, also recognized as the prime lending rate.
Here’s how the prime rate in Canada has changed over the last five years:
July 12, 2023 | 7.2% |
June 8, 2023 | 6.95% |
Jan. 25, 2023 | 6.7% |
Dec. 8, 2022 | 6.45% |
Oct. 27, 2022 | 5.95% |
Sept. 8, 2022 | 5.45% |
July 14, 2022 | 4.7% |
June 2, 2022 | 3.7% |
April 14, 2022 | 3.2% |
March 3, 2022 | 2.7% |
March 30, 2020 | 2.45% |
March 17, 2020 | 2.95% |
March 5, 2020 | 3.45% |
Oct. 25, 2018 | 3.95% |
July 12, 2018 | 3.7% |
Source: Wowa.ca
In practical terms, banks and various financial institutions adopt the prime rate as a reference point to determine the interest rates they charge customers for loans and other financial products.
Consequently, if you’re considering applying for a loan in Canada, the interest rate applied will align with the current Canadian prime rate.
While prime rates across most major cities in Canada might exhibit uniformity, slight variations can arise based on the financial institution, your credit history, and several other influencing factors.
Why Does the Prime Rate Change?
Each year, the Bank of Canada (BoC) reviews and sets the prime rate, which is important for many Canadians as it influences most variable-rate loans.
The BoC changes the prime rate based on detailed economic data. Its goal is to keep prices stable by controlling the country’s money supply. They aim to keep consumer prices within a set range based on future trends.
A key factor in this process is the BoC’s overnight rate, which can change depending on the health of the Canadian economy and financial markets. By adjusting this rate, the BoC works to protect the economic well-being of Canadians.
When the BoC changes its overnight rate, the prime rate changes too. This is the rate banks use to lend to their best customers. So, if the BoC changes its overnight rate, the prime rate will also shift.
The BoC’s decisions are based on economic forecasts and an analysis of factors like inflation, employment, and the global economy.
If the economy grows faster than expected, the BoC might raise rates to control inflation. If growth is slower, the BoC might lower rates to boost spending and economic activity.
How is the Prime Rate in Canada Determined?
The prime rate in Canada is set through a combination of factors, including the Bank of Canada’s key policy interest rate, bond yields, and other economic indicators.
The Bank of Canada (BOC) plays a central role in this process by setting a target range for the overnight rate, which is the rate at which the BOC lends money to other banks.
When the BOC changes the overnight rate, it directly affects variable-rate loans because banks usually have floating prime rates linked to the BOC’s rate. Major banks often adjust their prime rates quickly in response to changes in the BOC’s overnight rate, while smaller lenders follow suit to remain competitive.
Economic factors and government policies also influence the prime rate. The movement of money between banks impacts interest rates as well. When money flows rapidly between banks, interest rates tend to rise; when money movement slows down, rates tend to drop.
Overall, the prime rate is shaped by BOC policies, economic conditions, and the dynamics of the banking system. This rate plays a crucial role in determining borrowing costs and influences many financial decisions.
How the Prime Rate Affects You
The prime rate isn’t just a distant financial concept; it has a tangible impact on your everyday financial dealings. This influential rate is connected to various lending loans, directly influencing your interest rates in numerous ways.
Here’s a breakdown of how the prime rate can shape your financial landscape:
1. Credit Cards
When you swipe your credit card, the prime rate silently wields its power. Many credit cards have interest rates tied to the prime rate. This means that as the prime rate fluctuates, your credit card interest rate can follow suit.
As you apply for a credit card, the issuer considers the current prime rate. Your card’s interest rate is then set to align with this rate with a predetermined markup. If the prime rate climbs, your interest rate ascends as well.
This is why it’s crucial to inquire about the periodic interest rate used to calculate your charges when you apply for a credit card. If your credit card hinges on your creditworthiness, a strong overall credit history and timely payments can lead to lower interest charges.
2, Home Equity Line of Credit (HELOC)
The HELOC, which allows you to borrow against the equity in your home, is often linked to the prime rate. This means that as the prime rate sways, your HELOC’s interest rate follows suit.
Since banks profit significantly from interest on loans, the prime rate shifts can directly influence their profitability. If you’re considering a HELOC, keep a watchful eye on the prime rate. Applying during a period of lower rates can be financially prudent.
3. Variable Rate Mortgages
Variable-rate mortgages have gained attention in Canada, and the prime rate holds a significant sway here too. This type of mortgage has an interest rate that regularly changes based on an index reflecting the lender’s cost of debt.
All mortgage lenders use the prime rate as a benchmark to set interest rates on variable-rate mortgages. Your interest rates’ directions might align with the prime rate or run counter to it. If the prime rate dips, so might your payment. Conversely, if the prime rate climbs, brace for an increase in your payment.
Remember that factors like your credit history, the property’s specifics, and your chosen lender can also influence your mortgage rate.
4. Car and Auto Loans
Your dreams of a new car often revolve around loans, and the prime rate also plays a pivotal role here. Car and auto loan interest rates often mirror the prime rate’s shifts. When the prime rate shifts upward, car and auto loan interest rates tend to follow suit.
The prime rate’s sway directly impacts the amount you borrow for these loans. This emphasises the importance of understanding how this rate is determined. However, there’s a silver lining in fixed-rate auto loans. By locking in a fixed interest rate, you can shield yourself from the uncertainties of rising prime rates.
Prime Rate and Variable Interest Rates
Prime rates and variable rates are integral components that jointly determine the interest rates applicable to various types of loans, encompassing mortgages, lines of credit, and other borrowings.
When you opt for a variable loan, your interest rate is hinged on the prime rate, which is then adjusted by a numerical value known as a delta. This delta functions as an addition or subtraction to the interest rate, ultimately shaping the overall cost of borrowing.
The specific value of your delta, whether positive or negative, is influenced by a combination of factors, including your creditworthiness and other pertinent considerations.
Consequently, your actual interest rate can span a range extending from prime rate minus delta to prime rate plus delta. It’s worth noting that the bedrock for all outstanding balances is grounded in the prime rate.
However, deviations from the Bank of Canada’s (BoC) prime rate can transpire based on the unique terms of your loan, your creditworthiness at the time of loan approval, and any associated lender or third-party fees.
Furthermore, unsecured credit cards typically carry higher interest rates than secured loans like credit cards or car loans. The distinction lies in the collateral factor. Unsecured credit cards lack collateral, meaning the lender doesn’t have an asset to secure the loan against.
On the contrary, secured loans, supported by tangible collateral, tend to command lower interest rates and narrower deltas. Secured loans, underpinned by collateral, serve as a safety net for lenders.
This collateral guarantees that the lender can recover potential losses if you default on your loan. This stark difference in collateral presence significantly influences the interest rates associated with various forms of borrowing.
- Best High-Interest Savings Account in Canada
- Tax-Free First Home Savings Account (FHSA) for Canadians
- PC Money Account Review (2024): Prepaid Mastercard For PC Optimum Points
Final Thoughts on What is Prime Rate in Canada
To sum it up, the prime rate in Canada is a pivotal economic indicator that influences borrowing costs, impacting everything from mortgages to lines of credit.
So, whether you’re considering a new loan, analyzing your existing borrowing costs, or simply seeking to enhance your financial literacy, staying informed about the prime rate is key.
Keep an eye on the prime rate to confidently navigate Canada’s economic landscape’s currents. Stay tuned for more insightful updates on financial matters and make the most of your financial journey!
FAQs on What is Prime Rate in Canada
What’s the mortgage prime rate in Canada?
The current conventional mortgage prime rate is 7.2%, as the Bank of Canada set on July 12, 2024.
How often does the prime rate change in Canada?
Every time the Bank of Canada announces a rate hike, prime changes.
What is the highest prime rate in history?
On December 19, 1980, the prime rate reached an all-time high of 21.5%, setting a new record.
Do all banks have the same prime rate?
Because each bank sets its own interest rate, there is no such thing as a single prime rate.