The Prime Rate in Canada
Why Does it Matter to Mortgage Borrowers?
Canadian mortgage borrowers have experienced stress over the past year due to increasing interest rates. News headlines commonly refer to the prime rate, noting the frequent increases in the prime rate and the impact it has on variable-rate mortgage borrowers. As a mortgage borrower, do you understand how the prime rate affects you?
What is the prime rate?
The prime rate in Canada as of April 10, 2024 is 7.20%. It has been 7.20% since July, 2023.
The prime rate is most commonly defined as the interest rate commercial banks charge their most credit-worthy customers. It serves as a benchmark rate for setting the rates on a variety of financial products, including mortgages, personal loans, and lines of credit. The prime rate is influenced by a number of factors, including inflation, economic growth, and the supply and demand for credit.
The prime rate is determined by the banks themselves, and it is typically set at a level that is 1.5 to 2.5 percentage points above the overnight lending rate (aka: the Policy Rate) set by the Bank of Canada. The prime rate is currently (as of Mar 14, 2024) 7.20%, the highest it has been in over twenty years.
The current prime rate appears high to us today, partly due to the fact that is has been unusually low over the past decade. The average Prime Rate over the past 50 years is 7.23%, comparable to today. However, the average over the past 20 years is 3.75%. Compared to more recent history, the prime rate is high at 7.20%.
How is the prime rate determined?
The Bank of Canada's monetary policy is a key determinant of the prime rate even though it does not directly set the rate. The Bank of Canada uses its benchmark overnight lending rate to regulate the nation's economic growth and restrain inflation. The Bank of Canada influences short-term interest rates by adjusting the target for the overnight rate on eight fixed dates each year.
| Date | Prime Rate | Change |
|---|---|---|
| Jul 2023 | 7.20% | +0.25% |
| Jun 2023 | 6.95% | +0.25% |
| Jan 2023 | 6.70% | +0.25% |
| Dec 2022 | 6.45% | +0.50% |
| Oct 2022 | 5.95% | +0.50% |
| Sep 2022 | 5.45% | +0.75% |
| Jul 2022 | 4.70% | +1.00% |
| Jun 2022 | 3.70% | +0.50% |
| Apr 2022 | 3.20% | +0.50% |
| Mar 2022 | 2.70% | +0.25% |
| Mar 2020 | 2.45% | -0.50% |
| Mar 2020 | 2.95% | -0.50% |
| Mar 2020 | 3.45% | -0.50% |
| Oct 2018 | 3.95% | +0.25% |
There are times, such as when the Covid outbreak began, that the Bank of Canada may meet more frequently to set rates. They did so three times in March 2020.
When the Bank of Canada changes the overnight rate, the Canadian banks usually change their prime rates within a couple days. They tend to move their prime rates by the same amount and in the same direction that the Bank of Canada moves the overnight lending rate.
How to find the prime rate in Canada online
An online search of ‘prime rate in Canada’ should produce a result. Just be sure it is the current Canadian prime rate you find since the rate can change several times throughout the year. You can also find the prime rate for any particular big bank on their website. The Bank of Canada also posts daily updates for a variety of market rates, including the prime rate, here - https://www.bankofcanada.ca/rates/daily-digest/
How do banks use the prime rate?
Banks use the prime rate as a benchmark rate for a variety of financial products, including mortgages, personal loans, and lines of credit. The interest rate charged for these products is typically set at a margin above or below the prime rate. Most products will have a rate of Prime plus a margin but variable-rate mortgages for the best borrowers are usually priced at Prime minus a margin. For example, a bank might offer a variable-rate mortgage at a rate of prime minus 1% (equal to 6.20% today). As the Prime Rate moves up or down, the variable mortgage rate will move also, but the margin stays the same for the term of the mortgage.
How are variable mortgage rates set relative to the prime rate?
Variable rate mortgages are directly tied to the prime rate. When the prime rate goes up, so does the interest rate on a variable rate mortgage. Conversely, when the prime rate goes down, so does the interest rate on a variable rate mortgage. This means that borrowers with variable rate mortgages are exposed to interest rate risk, as the cost of their mortgage will increase if the prime rate increases.
The margin relative to the prime rate depends on market conditions, the risk profile of the borrower and the costs of lending. When market conditions are positive, the margin for the best borrowers can be as much as minus 1.50%. When market conditions worsen, that margin can be as small as 0.25% to 0.50%.
The prime rate is usually the same for all banks. They will use their prime rate for pricing variable rate mortgages and the competitive difference in rate between the banks is the margin below the prime rate that they offer. However, there is one bank that does things differently. TD Bank uses a prime rate for mortgage lending that is equal to their prime rate plus 0.15%. They have been doing this since 2016. Borrowers should note this since TD needs to offer a larger margin discount to their prime rate to get you to the same rate being offered by other lenders.
| Rate | Target Overnight Rate | Prime Rate | Variable Mortgage Rates |
| Who Decides | Bank of Canada | Banks | Banks & other lenders |
| Current Rate | 5.0% | 7.2% | Between 6.0% and 7.5% |
What is the historic margin between variable mortgage rates and the Prime Rate?
The historic margin between variable mortgage rates and the prime rate has varied over time. In general, the margin tends to be a discount ranging between 0.25% and 1.5%, depending on market conditions and the risk profile of the borrower. During times of economic uncertainty or when credit conditions are tight, banks may offer less of a discount margin to account for increased risk.
For those of you that are looking to get a Heloc, you should note that the rate for a Heloc will be higher than for a variable-rate mortgage. Helocs carry an interest rate that is usually prime plus a margin. This margin can range between 0.50% and 3.0% at the banks.
Can anyone predict where the prime rate will go in the future?
Predicting where the prime rate will go in the future is difficult. It is influenced by a wide range of factors and, as we saw in 2022, can be subject to sudden changes. Some economists and analysts use models to make forecasts projecting the future direction of interest rates, but these projections are often imprecise and subject to error. Ultimately, the direction of the prime rate will depend on a variety of economic factors that influence the rate setting policy of the Bank of Canada, including inflation, economic growth, and the supply and demand for credit.
Most Recent Bank of Canada Rate News
As expected, the Bank of Canada announced on April 10, 2024 that they are maintaining their target overnight rate at 5.0%. This rate has remained unchanged since July 2023. In their accompanying statement they stated that inflation remains too high but is trending lower. The Bank is waiting for signs that this trend is sustained before considering rate cuts.
Tiff Macklem, the Governor of the Bank of Canada, said ‘we are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained.” He also said that a rate cut in June is “within the realm of possibilities.”
Market expectations for a rate cut keep getting pushed back. While a cut in June may be possible, some market watchers think July is now more likely. Timing is one issue and the size of the cuts is another. Economic numbers remain strong in Canada and the US. and inflation readings are not coming down as quickly as hoped. Former Bank of Canada Governor, Mark Carney, stated this week that rate cuts are likely to be “shallower and slower’. Expectations for the total amount of rate cuts in 2024 have been reduced from the initial expectations of up to 1.5%.
The Bank of Canada expects headline inflation to remain neor 3% for the first halt of 2024, 2.50% in the second haif and then reach their inflation target of 2% in 2025. This morning the US released CPI (inflation) data for March and it was higher than expected. Canadian CPI for March will be released on April 16.
Inflation is moving down slowly. The increase in the US data today shows that the path to lower inflation is uncertain and the timing of cuts could be further delayed. If we are moving toward lower inflation, the dato will be bumpy and likely not consistently reassuring to an expectant marketplace. The Bonk stated in their press release, “Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank's balance sheet. While inflation is still too high and risks remain, CPl and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained: They also repeated their often stated mantra - The Bank remains resolute in its commitment to restoring price stability for Canadians.”
The prime rate at the banks remains at 7.20% (7.35% for mortgages at TD Bank).
You can read the Bank of Canada's full press release here - https://www.bonkofcanada.ca/2024/04/fad-press-release-2024-04-10/.
The next scheduled policy interest rate announcement is June 5, 2024.
Conclusion
The Canadian bank prime rate plays an important role in the country's financial system, serving as a benchmark rate for a variety of financial products. While the Bank of Canada does not directly set the prime rate, it does have an indirect influence on it through its monetary policy. Banks use the prime rate as a basis for setting interest rates on loans and lines of credit, and borrowers with these variable-rate products, such as variable-rate mortgages, are exposed to interest rate risk. While predicting the future direction of the prime rate is difficult, understanding how it is determined and how it is used by banks and borrowers can help individuals make informed financial decisions.
If you have a variable rate mortgage you need to be aware that rates may continue to increase. However, market expectations are that rates will come down in 2024. This does appear likely but be careful not to put too much weight on these predictions. They have been wrong in the recent past. If you are risk-averse, manage your own affairs without trying to guess where rates are going. Variable-rate mortgages contain risk and are not for everyone. If you are certain in your belief that rates are coming down then a variable-rate mortgage might make sense, but understand that variable rates are materially higher than fixed rates today so that rate decline needs to be significant for you to benefit.
If you are in the market currently for a mortgage, a fixed rate might be the best solution. Perhaps even a short-term fixed-rate mortgage. With no exposure to interest rate risk during the term of the mortgage, a fixed-rate mortgage is the conservative choice for the majority of us that have a low risk tolerance.
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Prime Rate FAQs
When the bank of Canada increases or decreases their overnight target borrowing rate, the banks will usually change their prime rate by the same amount within a couple days.
The prime rate does not directly affect fixed mortgage rates. It does affect variable mortgage rates. Most mortgage lenders set their variable mortgage rates at a margin versus the prime rate. This can be either a premium or discount to the prime rate. For example, for a prime, closed variable rate mortgage you might see the rate quoted at prime minus x%. For a heloc you may see a rate of prime plus x%.
All the major banks set their own prime rate. They tend to be the same over time among all the banks. However, for pricing mortgages, TD Bank has a prime rate 0.15% higher than the other banks. Non-bank mortgage lenders will price their variable-rate mortgages using the prime rate from their chosen bank.
Also referred to as the Bank of Canada’s policy rate, this is the benchmark cost of
borrowing set by the Bank of Canada. It is the rate at which Canada’s banks can borrow
money from each other or from the Bank of Canada on an overnight basis. The BoC updates
the rate periodically throughout the year. This rate is the main tool used by the BoC to
set monetary policy. They adjust the rate to regulate the cost of borrowing and demand
for investment and this can be used to control inflation and economic activity.
When the updates are done, change the date on the blog but instead of just showing the
date please say “Updated April 10, 2024”.
Don Scott
Don Scott is the founder of a challenger mortgage brokerage that is focused on improving access to mortgages. We can eliminate traditional biases and market restrictions through the use of technology to deliver a mortgage experience focused on the customer. Frankly, getting a mortgage doesn't have to be stressful.
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