Are you wondering what the Canadian prime rate is? Or are you wondering how it is determined, or how it can affect you? This article is for you.
Prime is one of the essential rates when it comes to interest rates for lending institutions in Canada.
These rates help set mortgage rates and other financial loans such as bank loans and home equity lines of credit.
However, prime rates are dynamic, fluctuating between high and low depending on the economy.
Thus, the changes in the prime rate can affect variable-rate products such as your mortgage or investment loans, so it’s essential to stay informed about this important economic indicator.
But what exactly is the prime rate? And how does it affect your loans? Read on to learn everything you need to know about Canada’s prime rate and how it affects your finances.
What is Prime Rate in Canada?
Prime rate in Canada is a benchmark interest rate set by the Bank of Canada as the basis of banks interest rates on loans.
The prime rate is an essential factor in determining any variable or floating-rate loan in Canada since most lenders use this rate to establish the margin on their loans.
However, while the Bank of Canada sets the interest rates, it has no control over the banks. The bank by which you receive your loan or your line of credit sets this number.
This rate serves as an indicator for the economy because it influences the interest rates on variable-rate loans and lines of credit.
The Bank of Canada sets the prime rate, also known as the prime lending rate, at its regular monetary policy framework meetings.
Banks and other financial institutions use the prime rate when determining what they will charge their customers for loans and other financial products.
Therefore, if you apply for a loan in Canada, you’ll be charged an interest rate according to the current Canada prime rate.
Though prime rates in Canada might be the same in most big cities, rates may vary depending on your financial institution, credit history, and several other factors.
What is the Prime Rate in Canada?
The current Canadian prime rate is 2.45%. The prime rate in Canada has remained at 2.45% since April 1, 2020, and is subject to change anytime.
The table below shows historical prime rates in Canada:
Why Does the Prime Rate Change?
Each year, the prime rate is reviewed and set by the Bank of Canada (BoC). The rate affects millions of Canadians because it is the benchmark interest rate used to price most variable rate loans.
The BoC decides on changes to the prime rate based on economic data. The Bank of Canada’s monetary policy is set to maintain price stability. The BoC moderates the country’s money supply to keep consumer prices, as measured through the Consumer Price Index, within this range and predicted trends.
The bank’s key interest rate, known as the overnight rate, fluctuates based on the health of the Canadian economy and its financial markets.
It sets this rate to ensure Canada’s monetary policy supports the economic and financial interests of Canadians.
When it raises or lowers its interest rate target (the overnight rate), this directly impacts the prime rate (the rate at which banks and financial institutions lend money to their best clients).
The BoC’s monetary policy decisions are heavily influenced by economic forecasts, determined by analysing data on inflation, employment, and international economic conditions.
Thus, if the economy grows more than forecast, the BoC might raise rates to keep inflation in check. Also, when the economy is growing slower than forecast, the Bank might lower rates to stimulate spending.
How is the Prime Rate in Canada Determined?
Many factors determine the prime rate in Canada, including the Bank of Canada’s key policy interest rate, bond yields, economic indicators, and other factors.
The BOC determines prime lending rates through its policy settings. This consists of setting a target for the overnight rate, which is the rate it charges to lend money to other banks.
The overnight rate affects variable-rate loans because banks typically have floating prime rates which are tied to the variable-rate environment.
Banks are therefore highly influenced by the interest rates set by the BoC, which determines them based on changes in interest rates globally.
However, when the Bank of Canada changes its overnight rate, not all banks necessarily change their prime rates.
As major banks use this rate to determine their prime lending rates, it affects the interest rates you pay for your personal loans and mortgages.
Banks follow the direction set by the Bank of Canada. This is because they have to compete for customers, so they have to offer competitive interest rates.
Also, other lenders look at several key indicators from the Bank of Canada when determining their prime rate. They also take into account policy directives from the federal government.
Additionally, as the banking system transfers money between institutions, it affects the overall interest rate market. If more money is moving through banks, then the interest rates will go up.
Also, if less money is moving through banks, then the interest rates will go down.
How the Prime Rate Affects You
Prime rate can directly affect your interest rates on a wide variety of transactions because it’s tied to many different lending loans.
Therefore, if you borrow money, whether a personal loan, home improvement project or automobile purchase, chances are you’ll pay interest based on the current prime rate.
Below is how prime rate affects you in different ways:
One of the most significant factors that determine your credit card interest rate is the prime rate. Some credit cards have a prime rate that can vary with the rest of the economy.
When you apply for a credit card, the issuer will check the current prime rate and set the rate on your new account to match this level, plus a predetermined mark-up.
If the prime rate goes up, so does your interest rate. So, it is essential to ask when applying for these credit cards what periodic interest rate they are using to calculate your interest.
However, a consumer with a credit card that is backed by their creditworthiness would enjoy smaller interest charges if their overall credit is strong and they pay on time.
Therefore, understanding how the prime rate affects you can help to clarify why your credit card might be charging you more than you expected.
Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) is a revolving line of credit where you can borrow more money with an agreed payment period using your home as collateral.
A HELOC is usually tied to the prime rate, which fluctuates based on the overnight lending rate by the Canadian central bank.
Since banks make most of their money off of interest on loans, if the prime rate goes up or down, their profitability goes with it.
Therefore, if you are thinking of applying for a HELOC, watch the prime rate carefully. If it is high during the summer months, you may want to consider applying in the spring before the rates go up.
Variable Rate Mortgages
If you’re considering a variable rate mortgage, chances are you’ve heard of the prime rate and wondered how it affects you.
A variable-rate mortgage is a loan with an interest rate that is regularly altered according to an index representing the lender’s cost of debt on the financial markets.
The good news is that this type of mortgage can be a smart way to lower your monthly payments and get out of debt sooner.
But how does the prime rate affect your loan? The prime rate is the benchmark used by all mortgage lenders to determine their interest rates on variable-rate mortgages.
The interest rates on variable-rate mortgages may move in the same direction as the prime rate or move in the opposite direction.
Therefore, if you have a variable-rate mortgage and the prime rate decreases, you may end up with a lower payment. Also, if the prime rate increases, your payment will increase.
Nevertheless, your mortgage rate can also be affected by different factors like your credit history and score, the type and size of the home you’re buying, and the lender you choose.
Car and Auto Loans
The interest rate of car and auto loans that are based on the prime rate change whenever this rate changes. When the prime rate goes up, most car and auto loans also increase.
Since the prime rate directly affects how much you borrow on a car or auto loan, it is essential to understand how it is determined.
However, one exception is a fixed rate auto loan, a type of car or auto loan that takes away the uncertainty of rising interest rates.
By locking in a fixed interest rate, borrowers can make sure their payments stay the same no matter what happens to the prime rate.
Prime Rate and Variable Interest Rates
Prime and variable rates are used together to determine the interest rate on many types of loans, including mortgages, lines of credit and loans.
When you apply for a variable loan, your interest rate will be set to the prime rate plus or minus a number called a delta.
A delta is a number added or subtracted from the interest rate to determine your borrowing cost.
Based on your creditworthiness and other factors, your delta may be positive or negative.
Because of this, your interest rate may range from prime − delta up to prime + delta. The base rate for all outstanding balances is the prime rate.
However, your interest rate may vary from our BoC’s prime rate based on the terms of your loan, your creditworthiness at the time your loan is approved, and any lender or other third-party fees.
Additionally, an unsecured credit card will generally have a high-interest rate. In contrast, a secured loan like a credit card or car loan will likely carry a lower interest rate and low deltas.
This is because this type of credit card, unlike a mortgage or auto loan, has no collateral for the bank to secure the loan.
Secured loans are backed by collateral used to ensure that if you default on your loan, there is something that can compensate for any potential loss incurred by the lender.
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Final Thoughts on What is Prime Rate in Canada
The prime rate in Canada is a major factor in setting the interest rates offered on mortgages, personal lines of credit, consumer loans and other types of loans.
Although it’s based on the prime rate interest rate that financial institutions set their interest rates, it doesn’t affect all loan rates the same way.
So understanding what a prime rate is and how it works can help you get the best rates available.
Hopefully, now you know what Canada’s prime rate is, how it affects you and how it is determined.
FAQs on What is Prime Rate in Canada
What’s the mortgage prime rate in Canada?
The current conventional mortgage prime rate is 2.45%, as the Bank of Canada set on April 1, 2020.
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.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
The primary purpose of Money Reverie is to help everyday Canadians make better financial decisions by providing up-to-date financial news and information, reports, product reviews, and government programs.