Prime Rate in Canada
Jamie David, Director of Marketing & Mortgages
The prime rate in Canada today is currently 5.95%. The prime rate, also known as the prime lending rate, is the annual interest rate Canada’s major banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages.
The prime rate is primarily influenced by the policy interest rate set by the Bank of Canada (BoC), also known as the BoC's target for the overnight rate. While these rates are not the same, they are closely related. When the Bank of Canada changes the target for the overnight rate, lenders will generally adjust their prime rates within a few days.
What is the prime rate?
When you apply for a loan with a variable interest rate, your lender will give you an annual interest rate that’s tied to the bank’s prime rate. All kinds of loans are based on this rate, including certain mortgages, car loans, personal lines of credit, and even some credit cards. Think of the prime rate as the anchor these other interest rates are based on. As the prime rate in Canada moves up or down, so too does the rate of interest you pay on your loan.
How is the prime rate set in Canada?
Each bank sets its own prime rate, but the Big Five Banks usually all have the same prime rate. The prime rate is primarily influenced by the policy interest rate set by the Bank of Canada (BoC), also known as the BoC's target for the overnight rate. When the BoC raises the overnight rate, it becomes more expensive for banks to borrow money, and they raise their respective prime rates to cover the added costs. Conversely when the BoC lowers the overnight rate, banks usually lower their prime rates by the same amount.
Is the prime rate going up in Canada?
As a result of a series of increases in the Bank of Canada's policy interest rate, the prime rate has also been steadily going up since the beginning of 2022. The Bank of Canada has indicated that more policy interest rate increases are on the horizon, meaning that the prime rate in Canada will continue to go up.
How does the prime rate affect mortgage rates in Canada?
There are two main types of mortgage rates in Canada – fixed and variable. When you get a fixed mortgage rate, you agree to pay the same rate over the entire course of your mortgage term regardless of what happens in the outside market. Fixed mortgages are a good option if you’re worried mortgage rates will go up, or if you want to enjoy the stability of paying the same mortgage rate until it’s time to renew.
When you get a variable mortgage rate, the rate will be expressed as the prime rate plus or minus a certain percentage. When the prime rate in Canada goes up or down, your mortgage rate will go up or down by the same amount. Variable mortgages usually come with a lower rate vs. fixed-rate mortgages when you sign up, but there’s the risk that the rate could go up (or down) during your mortgage term. Many lenders will allow you to convert a variable-rate mortgage to a fixed-rate mortgage at any time, but you will have to pay the fixed rate as of the time you decide to switch.
Let’s look at an example. If the prime rate is 3.0%, and you get a variable-rate mortgage at prime minus 0.8%, your effective interest rate will be 2.2%.
Example 1: Your original mortgage rate
prime rate - discount to prime rate = your mortgage rate
3.00% - 0.80% = 2.20%
The prime rate can rise and fall over time, and variable-rate loans will rise and fall with it. To continue this example, if the prime rate were to increase by 0.25% to 3.25%, the interest rate on your mortgage would rise by the same amount, to 2.45%.
Example 2: Your new rate after prime rate increases during your mortgage term
new prime rate - discount to prime rate = your new mortgage rate
3.25% - 0.80% = 2.45% (new mortgage rate)