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Prime rate in Canada

Key Takeaways

1. Canada's prime rate as of today is currently at 7.20%, influenced by the Bank of Canada's policy interest rate, also known as the target for the overnight rate.

2. The prime rate impacts variable loans and lines of credit, including variable-rate mortgages. When the Bank of Canada changes its overnight rate, lenders typically adjust their prime rates accordingly.

3. The housing market is experiencing a noticeable uptick in activity, as highly motivated buyers come in from the sidelines, spurred by the prospect of rate cuts later this year.

The prime rate in Canada today, March 18, 2024, is currently 7.2%. 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.

Prime rate vs. Bank of Canada target for the overnight rate

Canada Prime Rate Changes: 2010 - 2024

Effective Date Prime Rate Change
July 12, 2023 7.20% 0.25%
June 8, 2023 6.95% 0.25%
January 25, 2023 6.70% 0.25%
December 8, 2022 6.45% 0.50%
October 27, 2022 5.95% 0.50%

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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.

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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.

February 2024: Mortgage market update

The Canadian mortgage market has experienced considerable volatility in the last few months, and the initial weeks of 2024 have proved to be no exception. Bond yields have resumed their ascent after a brief period of falling, pushing fixed mortgage rates up with them. Meanwhile, variable mortgage rates remain elevated in the wake of the Bank of Canada’s historically steep 10 rate hikes effected between March 2022 and July 2023. If you’re looking to take out a mortgage in Canada, here’s what you should know:

  • Real estate update: On February 14, 2024, the Canadian Real Estate Association (CREA) came out with the most recent statistics for the Canadian housing market for the month of January. The latest data shows that the housing market is seeing the signs of a rebound in activity after remaining relatively anemic for the latter half of 2023. Some 25,540 homes changed hands across Canada in January, marking a noticeable 22% yearly increase, and up by 3.7% monthly. New listings grew by 1.5% in January, but not enough to offset the jump in demand. This has added fresh pressure to the market and pushed the sales-to-new-listings ratio (SNLR) to 58.8%. CREA uses the SNLR to gauge competition in a given market. A ratio between 40 - 60% indicates a balanced market, with above and below that threshold reflecting sellers’ and buyers’ markets, respectively.   

    Read more: Canadian realtors hopeful sales growth will continue

  • CPI update: At last, there seems to be some good news on this front for consumers, as the latest Consumer Price Index (CPI) reading from Statistics Canada for the month of January came in at only 2.9%. This was below expectations, and well under the previous month’s reading of 3.4%. In fact, this is the first time since March 2021 that the CPI has come in at less than 3%. The most significant contributor to January’s lower figure is softening gas prices, which stood at 3.2%, down from 3.5% in December; this marks the fifth consecutive month that gas prices have fallen. Another key factor was food costs, which were notably down to 3.4% in January, after registering at 4.7% the month before. This most recent CPI reading is within the Bank of Canada’s inflation target range of 1 - 3%, and means that the Bank will almost certainly be holding rates steady for the near future. If inflation continues to head in the right direction, many experts are forecasting rate cuts as early as the second quarter of 2024.

Read more: Inflation falls to 2.9% in January

 

2024 Housing market forecast

Given the growing expectations of rate cuts and pent-up buyer demand, CREA has updated its forecast for 2024 and 2025. 

It expects that some 489,661 homes will change hands in 2024, an increase of 10.1% from 2023. Sales growth is forecast to be most noticeable in markets where housing demand has remained consistently robust, like Alberta. However, even markets that suffered from historically low demand, such as Ontario, British Columbia and Nova Scotia are expected to enjoy growth as well. The average home price in Canada is predicted to climb by 2.3% to $694,173, with the most significant increases projected for Alberta, Quebec, New Brunswick, Nova Scotia and Newfoundland and Labrador. Home prices in British Columbia and Ontario, on the other hand, are expected to remain relatively unchanged. 

The housing market is projected to continue its recovery in 2025, with sales expected to hit 525,498 residential properties (an annual increase of 7.3%, while the average home price in Canada is expected to climb by 4% to $722,063.

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 to control historically high inflation rates, the prime rate had also been steadily going up since the beginning of 2022 and into early 2023.

After a conditional pause in rate hikes for most of the first half of 2023, obstinately high inflation and strong Q1 GDP growth incited the Bank to once again resume rate hikes. In its June and July announcements, the Bank raised its key overnight lending rate by 0.25% twice in a row for a total of 10 rate hikes since March 2022, bringing it to 5%. As a result, the Prime rate rose to 7.2%.

Most recently, in the Bank’s second announcement of the year on March 6, it chose to hold the target for the overnight rate steady at 5% for the fifth consecutive month, citing weak GDP, reduced consumer spending and falling wage growth as among the main drivers of its decision. It noted that inflation remains above its target of 2%, and indicated that rates will need to remain higher for longer while it ensures that inflation is well and truly tamped down. With the overnight lending rate remaining unchanged, the prime rate will stay at its current level of 7.2%.

 

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)

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Prime Rate in Canada: Frequently asked questions

What is Canada's current prime rate?


What will the prime rate in Canada be in 2024?


How is the prime rate related to the Bank of Canada’s key interest rate?


Why is TD’s mortgage prime rate higher than the mortgage prime rate of the other Big 5 Banks?


WATCH: March 6, 2024 Bank of Canada announcement

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