Prime Rate Canada

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 several factors, including inflation, economic growth, and the supply and demand for credit.

The prime rate is determined by the banks themselves, and is typically set at a level that is 1.5 to 2.5 percentage points above the overnight lending rate set by the Bank of Canada. The prime rate has been declining in recent months and is currently (as of October 29, 2025) 4.45%.

Each Canadian bank sets their own prime rate. They generally end up being the same rate, with no difference between the banks. Independent mortgage lenders do not set their own prime rate. They reference one or more of the big banks and use their prime rates as their reference prime rate.

The Bank of Canada's monetary policy is a key determinant of the prime rate even though it does not directly set it. 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.

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.

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 0.5% (equal to 3.95% 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.

Variable mortgage rates 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 their mortgage payments can 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 more than 1.00%. When market conditions are weaker, that margin can be as small as 0.25% to 0.50%.

As an example, using today’s prime rate, the rate on a variable rate mortgage might be 3.95%:

4.45% - 0.50% = 3.95%

If the prime rate was reduced by 0.25% to 4.20%, the rate on a variable-rate mortgage would become:

4.20% - 0.50% = 3.70%

The margin of 0.50% stays the same for the term of the mortgage but the mortgage rate will change when the prime rate changes.

The prime rate is usually the same for all banks. They will use this base prime rate for pricing variable rate mortgages and the competitive difference in rate 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.

The prime rate fluctuates over time. There have been significant increases in the past, primarily due to central bank efforts to tame inflation, very similar to what happened in Canada in 2022. The current prime rate seems very high but is it really that high when compared to the past? The answer is yes, when you compare it to recent history. However, the business and interest rate cycles run over a long time period and when you look back further in history, today’s prime rate looks low.

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 0.5% 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.

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 forecast 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.

Trying to predict the future direction of interest rates can be a risky exercise for a mortgage borrower. Just look at what happened to variable-rate mortgage holders in 2022. Many took out variable rate mortgages when rates were very low and subsequently experienced financial stress due to higher rates. A fixed-rate mortgage would have been a better decision. Looking at a variable-rate mortgage as an opportunity to benefit from rates declining without considering the risk if

rates were to increase is a poor analysis. The best analysis for most of us is to find the rate that we can afford that we can lock-in for as long as possible. Making a bet on Interest rates is arguably inappropriate for a homeowner that is trying to secure financing for their house. It is a material risk. Assess your risk tolerance and understand what happens if your bet on rates does not work out. Taking interest rate risk is only appropriate for the minority of us that can afford to be wrong.

The Bank of Canada announced on October 29th that it has reduced its overnight policy rate by 25 basis points to 2.25%. This decision follows shortly after a similar cut last month and signals the Bank’s cautious approach in light of ongoing trade uncertainty with the United States. The Bank also suggested the easing cycle may be over.

Although the market is not anticipating additional rate cuts this year, it’s important to put the current environment in context. We have emerged from an extended cycle of rate reductions, and today’s rates are not only historically aligned but also at levels found in a healthy economy. This renewed affordability presents a timely opportunity for borrowers to re-evaluate their mortgage options and potentially benefit from the favorable rate landscape.

With this change, both the prime rate and variable mortgage rates will decrease by 0.25% by tomorrow. You will see the prime rate at major banks lowered to 4.45%. Insured variable mortgage rates are now firmly below 4% as are many uninsured variable mortgage rates, depending on the lender. Insured variable rates as low as 3.54% will be available in some Provinces. For Canadians with variable-rate mortgages, this means a reduction in borrowing costs and delivers relief for household budgets.

Bond yields have varied throughout the year and are down by over 0.40% since the summer. However, this only has them back to where they were in the spring. Since fixed mortgage rates are tied to bond yields, and not the Bank of Canada rate, there is no relief in sight for fixed mortgage rates. 

Bank of Canada Governor, Tiff Macklem, indicated that this level of rates might be sufficient to hold inflation near their 2% target, while also supporting the economy. The Bank stated that "GDP growth is expected to be weak in the second half of the year" and they do not project a pick-up in GDP growth in 2026. They also stated "The Bank expects inflationary pressures to ease in the months ahead and CPI inflation to remain near 2% over the projection horizon."

The importance of a resolution to our ongoing trade dispute with the US couldn't be more clear. Our central bank is focused on it and it affects significant policy decisions. This is made clear when the Bank states "The Canadian economy faces a difficult transition. The structural damage caused by the trade conflict reduces the capacity of the economy and adds costs. This limits the role that monetary policy can play to boost demand while maintaining low inflation. The Bank is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval."

In recent years average Canadians have thought about and discussed what the Bank of Canada is doing more than we can ever recall. Hopefully now that rates are back to historically normal and healthy levels, this focus on the Bank will diminish. If you attended a sporting event and all the talk was about the referees, then is wasn't a good event. We hope going forward that we can talk less about the referee in our market (the Bank of Canada) and more about people, products, opportunities and solutions. These are the conversations we expect in a healthy market.

You can read the Bank of Canada's full press release here - 

https://www.bankofcanada.ca/2025/10/fad-press-release-2025-10-29/

The next Bank of Canada rate announcement is scheduled for December 10.

Final Word

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 unexpectedly increase. The market now believes that the rate cutting cycle has ended and the Bank of Canada will not be cutting rates again in the near future. While this is the expectation today, the current geo-political environment is uncertain and the risks are high. 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 in the market currently for a mortgage, a fixed rate might be the best solution. 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.