What is the Prime Rate (or prime lending rate) you ask?

The prime lending rate in Canada is a base rate used by commercial banks to determine the rate at which they lend you money. It’s a term often used for their most credit-worthy clients.

While this applies largely to mortgages it is also applicable to unsecured personal lines of credit, certain credit cards, and almost all business-related loans.

For mortgages, the Prime rate is used specifically to express the variable rate mortgages. As you might know, the variable interest rate is expressed as either Prime minus (-) or Prime plus (+).

* Prime Minus would be considered a discount on the prime rate, while Prime Plus would be considered a premium on the prime rate.

Example: At the time of writing, the prime lending rate in Canada is 7.20%. If you’re being offered a 5-year variable rate mortgage of Pprime minus 1.00%, you are being offered a mortgage rate of 6.20% (7.20% – 1.00% = 6.20%). Your ‘discount’ (in this case 1.00%) remains constant throughout the term of your mortgage, regardless of when the prime lending rate rises or falls.

 

What Happens When the Prime Rate Changes?

We’re no strangers to the rise of the prime lending rate, especially over the last 24 months. However, starting in mid-2024 and continuing throughout 2025, we are expected to be in a prime rate-dropping cycle. Hypothetically, if prime falls to 5.50% between 2024-2025, your mortgage would fall by an equal amount. Using the same example above, your mortgage rate would drop from 6.20% to 4.50% (the equivalent drop in the prime rate).

*The exact opposite is true when the prime rate rises, as we have been from March 2022 to Present.

 

How do Banks determine the Prime Rate?

Banks do not just wing it when it comes to the prime lending rate. The prime rate is based on the Bank of Canada’s overnight lending rate. While not mandatory, financial institutions have been known to raise or lower their prime rate by the same amount as the change in the Bank of Canada’s overnight rate. Each year, the Bank of Canada publishes its full meeting schedule, so you can stay up to date with when interest rate announcements are taking place.

 

Do all banks in Canada have the same Prime Rate?

There is consistency across the industry when it comes to the prime lending rate. However, few banks are an exception to this. The true differences come in the form of discounts on the prime rate.

 

If you have questions about variable rate mortgages, or forecasts as to where the prime rate in Canada is headed, call us today at (905) 455-5005.