What is the prime rate?
The prime rate is the interest rate that commercial banks charge their most creditworthy customers, typically large corporations. In Canada, the prime rate is closely tied to the Bank of Canada’s overnight rate, meaning when the Bank of Canada changes its rate, the prime rate generally follows.
For individuals, the prime rate is important because variable-rate mortgages, lines of credit, and certain types of loans are often based on prime. For example, a mortgage may be offered at “prime + 1%,” so if the prime rate is 3%, your mortgage rate would be 4%.
The prime rate is also a barometer of overall economic health, with lower prime rates typically indicating efforts by the central bank to stimulate borrowing and economic activity, while higher prime rates are used to curb inflation.
The prime rate is the interest rate that commercial banks charge their most creditworthy clients—typically large corporations. In Canada, the prime rate is closely tied to the Bank of Canada’s overnight lending rate, which is the interest rate at which banks borrow and lend between each other. When the Bank of Canada changes its overnight rate, the prime rate usually follows, though there may be slight delays in how banks adjust their prime rates.
The prime rate influences many financial products for individuals. For example, a variable-rate mortgage might be offered at “prime + 1%”, so if the prime rate is 6.00%, your mortgage rate would be 7.00%.
Current prime rate in Canada
As of January 2025, the prime rate in Canada is 5.20%. This rate has been set in response to the latest economic conditions and the Bank of Canada’s decisions about monetary policy. The Bank of Canada uses the overnight rate as a tool to control inflation and stabilize the economy, which, in turn, affects the prime rate and lending rates throughout the financial system.
For the most up-to-date prime rate in Canada, it’s essential to regularly check with major financial institutions like RBC, TD, or CIBC, as they tend to follow the changes in the Bank of Canada’s overnight rate.
How does the prime rate affect mortgages?
The prime rate directly impacts variable-rate mortgages. When the prime rate rises, so does the interest rate on these mortgages, leading to higher monthly payments. Conversely, when the prime rate falls, borrowers with variable-rate mortgages enjoy lower interest rates and reduced payments. Fixed-rate mortgages, on the other hand, are based on bond yields and are not immediately affected by changes to the prime rate.
Key effects of prime rate changes on mortgages:
- Higher prime rate: Increases monthly payments for variable-rate mortgage holders.
- Lower prime rate: Reduces monthly payments, making borrowing cheaper for those with variable-rate mortgages or lines of credit.
- Stress test impact: The prime rate also plays a role in the mortgage stress test. As the prime rate increases, the stress test’s qualifying rate rises, making it harder for borrowers to qualify for new mortgages.
Historical prime rate trends in Canada
Tracking historical prime rate trends provides insight into how economic conditions have shifted over time. For example, the prime rate hit a historic low during the COVID-19 pandemic in 2020, falling to 2.45% as the Bank of Canada lowered rates to stimulate borrowing and economic recovery.
- 2008 financial crisis: During the global financial crisis, the prime rate in Canada dropped significantly as part of broader efforts to boost the economy. It remained low for several years.
- 2017-2019: As the economy strengthened, the Bank of Canada raised rates gradually, causing the prime rate to increase as well.
- 2020 pandemic response: In response to the COVID-19 pandemic, the prime rate was slashed to 2.45% in an effort to stimulate the economy through lower borrowing costs.
- 2022-2023: Due to rising inflation, the Bank of Canada began raising its rates again, driving the prime rate higher as banks sought to manage economic challenges and control inflation.
Understanding these trends can help borrowers and investors anticipate future changes. If you’re considering taking out a variable-rate mortgage, it’s helpful to look at the historical performance of the prime rate and make predictions based on current economic conditions.
Prime rate vs. overnight rate: What’s the difference?
While the prime rate and overnight rate are closely linked, they are not the same thing. The overnight rate is set by the Bank of Canada and represents the interest rate at which banks borrow money from each other overnight. This rate acts as a benchmark for the broader economy, influencing various interest rates throughout the financial system.
The prime rate, on the other hand, is set by individual banks but is heavily influenced by the Bank of Canada’s overnight rate. When the Bank of Canada adjusts the overnight rate, banks tend to follow suit by adjusting their prime rates accordingly.
How to take advantage of prime rate changes
If you have a variable-rate mortgage or a line of credit tied to the prime rate, it’s crucial to stay informed about potential changes. Here are some tips to help you navigate the impact of prime rate fluctuations:
- Monitor Bank of Canada announcements: Keep an eye on the Bank of Canada’s rate announcements, as they will directly impact the prime rate and, subsequently, your mortgage payments.
- Consider refinancing: When rates are low, refinancing to lock in a more favorable rate could save you thousands of dollars over the life of your mortgage.
- Use a mortgage broker: Mortgage brokers can help you find the best rates available and guide you on whether it’s better to stick with a variable-rate mortgage or switch to a fixed rate if rates are expected to rise.
FAQs on the prime rate in Canada
- What is the current prime rate in Canada?
- As of January 2025, the prime rate in Canada is 5.20%. It fluctuates based on economic conditions and decisions made by the Bank of Canada.
- How often does the prime rate change?
- The prime rate changes in response to adjustments made by the Bank of Canada to its overnight rate. These changes typically happen several times a year, depending on economic conditions like inflation, employment, and overall economic growth.
- How does the prime rate affect variable-rate mortgages?
- Variable-rate mortgages are directly influenced by changes in the prime rate. When the prime rate goes up, so do the payments on a variable-rate mortgage. Conversely, when the prime rate falls, monthly payments decrease.
- Can I lock in my variable-rate mortgage?
- Yes, many lenders allow borrowers to lock in a variable-rate mortgage to a fixed-rate mortgage if they are concerned about rising prime rates. However, this process often comes with penalties or additional fees, so it’s important to weigh the costs and benefits before making the switch.
Last modified: February 4, 2025
