What is the prime rate?
Formally called the prime lending rate, this fluctuating number is used to set interest rates on several different types of loans.
Loans tied to the prime rate include:
Variable-rate car loans.
Certain types of credit cards (typically balance transfer cards with variable APRs).
As the prime rate shifts up or down, so will the interest you pay if you currently have one of those loans. In addition, banks will offer better or worse deals on new fixed-rate loans, depending on the prime.
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Who sets the prime rate?
While each bank sets its own prime rate, the big five — Bank of Montreal (BMO), Bank of Nova Scotia (Scotiabank), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD) — usually have the same number.
That’s because the prime rate is heavily influenced by the BoC’s “policy interest rate.” It’s also known as the “target for the overnight rate,” because that’s what major banks charge each other for one-day loans.
When the BoC raises the overnight rate, it becomes more expensive for banks to borrow money. So they raise their respective prime rates to cover the added costs by pulling in higher interest from you.
When the BoC drops the overnight rate, banks usually lower their prime rates by the same amount — but there are some notable exceptions, as in 2015.
Canada prime rate history
|Date||Prime Rate||Target for the Overnight Rate|
Why does the prime rate go up and down?
The BoC is the nation’s central bank, and its mandate is to “promote the economic and financial welfare of Canada.” To do so, it modifies its targets for the overnight rate in line with the economy's performance and inflation forecasts.
If the economy is booming, the BoC might raise the target for its benchmark interest rate to pull back on people’s spending and keep prices from inflating to astronomical heights. The top banks will likely raise their prime lending rate in the weeks that follow.
When the economy is weakening or inflation dribbles to undesirable lows, the BoC will lower its overnight rate. Exceptional circumstances like the coronavirus pandemic can lead to emergency rate cuts, too.
"The spread of COVID-19 is having serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices. The pandemic-driven contraction has prompted decisive [action] to minimize any permanent damage to the structure of the economy," the Bank of Canada said in a news release in March 2020.
That was when it slashed the overnight rate to an all-time low of 0.25%, a level last reached during the 2008 financial crisis.
In January 2022 Bank of Canada Gov. Tiff Macklem announced to reporters that "interest rates will need to increase to control inflation. Canadians should expect a rising path for interest rates."
And they did. The central bank raised interest rates eight times in 12 months, only pausing the hike in March 2023. Rates have gone up twice more since then but have been paused since July, signalling that their efforts to calm inflation is working.
How the prime rate impacts you
Home equity lines of credit
If you have access to a HELOC, you'll feel the movements in the prime rate most closely.
Rates on those products change in sync with the prime. The adjustable rate on a HELOC might be advertised as "prime plus 1%" or "prime plus one," for example.
The rate on this hypothetical HELOC would have increased from 6.95% to 7.20% a few weeks later after the prime rate rose from 4.75% to 5%.
Similar to HELOCs, some lower-interest or variable APR credit cards might have an interest rate described as “prime plus 4.50% to 12.75%” or “prime plus 9.99%.”
Variable-rate auto loans shift in line with the prime, and the rate you’ll get on a new fixed-rate loan will change, too.
How much depends on the institution, so it's important to check with your lender when you hear about a prime rate hike or cut.
The two most common types of mortgages in Canada, fixed-rate mortgages and variable-rate mortgages, interact with the prime in different ways.
An active fixed-rate mortgage won’t be affected — that’s what makes them fixed — but the rates for new borrowers usually go higher or lower in step with the prime.
By contrast, the interest rate you pay with variable-rate mortgages tangos directly with the prime rate over the course of the loan. With a five-year variable mortgage, you could be quoted for a rate that looks like "prime -0.45%" — currently equalling 6.75%.
With interest rates this low, there’s rarely been a better time to snag a mortgage, variable or fixed.
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