Canada Prime Rate
Canada prime rate is currently 5.25%. The prime rate, is the interest rate that financial institutions and Canada’s major banks use to set the interest rates for variable-rate mortgages, loans, and lines of credit.
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The prime rate in Canada is primarily influenced by the policy interest rate that is set by the Bank of Canada (BoC); this is sometimes known as the BoC’s target for the overnight rate. Now, these rates are not the same; they are very closely related to each other. When the BoC changes the overnight rate target, most lenders and other financial institutions will adjust their prime rates within a few days to reflect this change.
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What is Prime Rate Canada?
Content last updated: Sept 8th, 2022
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When you apply for a mortgage or any personal loan with a variable interest rate, the Bank or lender will give you an annual interest rate that’s tied to the Bank’s prime rate. All kinds of loans and mortgages are based on this rate, including individual car loans, personal lines of credit, personal loans, credit cards, and even mortgages. Think of the prime rate or the prime rate Canada as the anchor as the other interest rates are based on. As the prime rate or Bank of Canada rates moves up or down, so does the interest rate you pay on your loan or variable mortgage.
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This is the prime rate Canada.
How is the Canadian prime rate set
Content last updated: Sept 8th, 2022
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Each Bank sets its Canadian prime rate, but the big five banks and some other financial institutions usually all have the same prime rate for their loan products. See, when the Bank of Canada or BoC raises the overnight rate, it becomes more expensive for banks and other financial institutions to borrow money, and they raise their respective prime rates to cover the added costs. This is also the same when the BoC lowers the overnight rate; banks usually reduce their prime rates by the same amount to reflect the change.
How does the prime rate affect the current mortgage rates?
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Mortgage rates in Canada come with two main types of mortgage rates variable mortgage rate and fixed mortgage rate. When you get a fixed-rate mortgage, you agree to pay the same rate over the entire term of the mortgage regardless of what happens with the Bank of Canada prime rate. Fixed mortgages are usually a good option if you’re worried about mortgage rates going up or if you want to enjoy paying the same mortgage rate and payment until it’s time to renew your current mortgage.
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When you get a variable mortgage rate, this rate will be set as the prime rate minus or plus a certain percentage depending on the Bank. See, as the prime rate goes up or down, which happens when the Bank of Canada rate moves, your variable mortgage rate will go up or down by the same amount typically. Variable-rate mortgages usually come with a lower rate compared to fixed-rate mortgages, but there’s the risk that the mortgage rate could go up (or down) during your mortgage term. The plus side is many banks and lenders, and financial institutions will allow you to convert your variable-rate mortgage to a fixed-rate mortgage at any time during the term of your mortgage, but you will have to pay the current fixed rate as of the time you decide to switch your mortgage.
Historical prime lending rates
Over time, starting in 1935, Canada’s prime rate has moved significantly over the past 70 years. Canada’s Prime rate reached an all-time high of 22.75% in August 1981. That is, in fact, the time as the Bank was frantically hiking interest rates to control runaway inflation here in Canada, this resulted in record-high interest rates for mortgage borrowers. Many homebuyers faced rates of more than 20% on their mortgages.
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The Bank of Canada and Canada’s prime rate hit a record low of 2.25% in April 2009. This came during the Financial Crisis when the Bank of Canada quickly dropped its lending rates to near-zero to stimulate the faltering economy during the financial difficulties at the time.
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The most prolonged period that prime rate remained unchanged occurred between September 2010 and January 2015, when prime rate sat at 3.00% during this time.
Canada prime rate forecast
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Canada’s Big Six banks all regularly publish forecasts for the prime rate, generally as far as a year or two into the future each year in their reports.
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Based on the average of the latest bank forecasts for the current year, the current expectations for Canada’s prime rate for this year and next year are as follows:
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- Year-end 2020: 2.45%
- Year-end 2021: 2.45%
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What causes the prime rate to change?
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The main factor driving changes to prime rate is inflation expectations. See, the Bank of Canada is required to set monetary policy to achieve a target inflation rate of 2%. This is reviewed each year, and it typically does this by increasing or decreasing its overnight rate bank rate.
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When economic models suggest that inflation is falling below the 2% target, the Bank of Canada will cut the overnight rate to stimulate more borrowing, inflation, and economic activity. That usually leads to a lower prime rate set for the Bank of Canada.
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When the BoC expects inflation to exceed the 2% target meaningfully, it typically hikes its overnight rate, leading to a higher prime rate.
