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What is the Prime Rate in Canada?

The prime rate, otherwise referred to as the prime lending rate, is the annual interest rate used by the major banks of Canada to set their lending rates for lines of credit and variable loans.

The policy interest rate that gets set by the Bank of Canada (BoC) is the primary influence of the prime rate. This also gets referred to as the BoC’s target for the overnight rate. Although these rates aren’t the same, they are similar to each other. Lenders adjust their prime rates within a few days after the BoC changes the target for the overnight rate.

The current prime rate for Canada as set by the BoC is 2.45%.

Types of Loans Based on the Prime Rate

There are a few loans that get based on the prime rate.

Bear in mind that not all interest rates for these get directly based on a financial institution’s prime rate.

Example:

If you applied at your bank for a mortgage and chose a variable interest rate, the interest rate offered to you gets based on your bank’s prime rate. It will be a certain percentage that is lower or higher than the prime rate. Because you chose a variable rate, your mortgage’s interest rate will increase or decrease if your bank’s prime rate increases or decreases.

Fixed interest rate: Regardless of the outside market, you pay the same rate throughout the loan term.

Variable interest rate: The rate gets conveyed as the prime rate plus or minus a certain percentage. If there’s a rise in the prime rate, your interest rate rises by the same amount. If it goes down, your interest rate will also go down by the same amount.

How Does the Prime Rate get Set?

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The major banks in Canada all have the same prime rate, but financial institutions can set their own prime rate. The primary influence of the prime rate is the policy interest that gets set by the BoC. This is also known as the BoC’s target for the overnight rate.

It becomes more expensive for banks to borrow money when the BoC raises the overnight rate, so to cover the added costs, they raise their prime rates. On the other hand, banks will lower their prime rates by the same amount when the BoC lowers the overnight rate.

There have been instances where the BoC has lowered the overnight rate, and banks chose not to lower their interest rates.

When Will the Prime Rate Change?

Announcements surrounding interest rates get made by the Bank of Canada eight times a year. The overnight rate can get changed during one of those announcements, which then impacts the prime rate. Keep track of the news for any changes.

How to Prepare for Rising Interest Rates

The cost of borrowing fluctuates based on the outside market, which affects the prime rate and overnight rate.

If you’ve borrowed money or have a mortgage with a variable interest rate, you need to stay prepared for the effects it can have on your finances both now and in the future. Ensure you prepare your finances for any increases that can affect the cost of borrowing.

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