Prime Rate Canada
A prime rate is the annual interest rate that the majority of Canadian banks and other financial institutions utilize to set interest rates for financial products. Prime rates are also referred to as prime lending rates. Whenever you apply for a loan with a variable interest rate, the lender will give you an annual interest rate that is interlinked with the prime rate.
Many loans revolve around prime interest rates including variable interest mortgages, car loans, lines of credit and credit cards. The prime rate acts as a base for these forms of financing. When the prime rate moves up or down, so does the rate on your financial product.
Let’s take some time to learn more about prime rates, how prime rates are determined, what causes prime rates to fluctuate among other things below.
What is the Prime Rate?
The prime rate is what banks use as their base to determine their variable interest rates and current fixed rate offerings. In a way, the prime rate is the base or anchor for a bank's financial offerings. The prime rate is the starting point for any type of fixed or variable interest rate and then additional points are added based on perceived risk and type of financial product such as mortgage, car, personal loans, etc.
What is the Current Prime Rate?
The current prime rate in Canada is 2.45%. The last change was on June 24 , 2020 and the prime rate down up by 0.50 percentage points at that time. The COVID-19 crisis and general global crisis has caused the prime rate to drop dramatically compared to the beginning of March.
The prime rate is mainly influenced by the Bank of Canada’s set policy interest rate, also known as the overnight interest rate. Every bank sets their own prime rate, but the major banks usually have similar or the same prime rate. The current prime rate is an average of Canada’s six largest bank’s prime rates. The six biggest banks tend to have set the exact same prime rate, while +other banks and financial institutions tend to differ a bit more.
How is Prime Rate Set?
Banks and financial institutions set their own prime rates and they usually refer to the rate set by the Bank of Canada in the process. The Bank of Canada sets their prime rate by using the policy interest rate, also known as the overnight rate.
The overnight rate is the interest rate which applies to depository institutions overnight. In other words, banks and other financial institutions lend and borrow funds from each other “overnight” and the overnight interest rate is applicable to them. Overnight rates are the lowest on the market and are only available to the most creditworthy financial institutions.
If the overnight rate increases then banks must pay more to borrow money and they pass these costs off to consumers via larger interest rates. On the other hand, if the BoC lowers the overnight rate most banks will drop their prime rates to match reducing variable interest rates at the same time. Although major Canadian banks follow this formula, they are not required to and technically can set their own prime rates.
As the Bank of Canada adjusts the overnight rate up or down, the prime rate fluctuates too. More specifically, the prime rate and overnight rate practically fluctuate together. When one goes up, the other goes up too. When one goes down, the other goes down too. This is a rule of thumb, sometimes they do not fluctuate together exactly. There are numerous cases where lenders do not adjust their prime rate in accordance with the overnight rate, frustrating many borrowers along the way.
What Causes Prime Rate to Rise and Fall?
We know that prime rates and overnight rates fluctuate together, but what causes the rise and fall? When the overnight rate increases, it becomes more costly for banks and financial institutions to borrow money from one another. In order to cover these costs, banks and financial institutions raise their prime rates to cover the additional costs. On the other hand, when the overnight rate decreases, it becomes cheaper for banks and financial institutions to borrow money from one another. As a result, banks and other financial institutions reduce their prime rate.
How Does the Prime Rate Affect Banking Products in Canada?
Simply put, when the prime rate goes up the cost of most banking products in Canada increases as well. When the prime rate drops, the price of most banking products in Canada decreases. If you want a fixed-rate mortgage or loan it is best to secure your loan while the prime rate is down so you are locked into a good interest rate. If you have a variable interest rate loan then you will notice when the prime rate fluctuates as your monthly payments will move up and down accordingly.
How Does the Prime Rate Affect Mortgage Rates?
In Canada, mortgages come with two main types of interest rates: fixed and variable. When you have a fixed interest rate, you agree to pay the same interest over the whole term of your mortgage. Events that occur in the outside market do not impact the interest rate you pay. Fixed mortgages are ideal if you’re concerned about outside factors and want to have a stable, predictable payment for your mortgage’s entire term.
How Does the Prime Rate Affect Variable Mortgage Rates?
If you have a variable mortgage rate it is set by the prime rate. If the prime rate changes then your variable rate will change. As mentioned above, the prime rate is an anchor for your variable rate and then the bank adds on additional interest based on your mortgage, financial situation, and the property. Even if you have a great credit score and a low mortgage rate it will still increase if the prime rate increases. Variable-rate mortgages are generally recommended when the prime rate is low whereas fixed-rate loans are a better idea for consumers who want a steady monthly mortgage payment that will not change.
It should be noted that while most major Canadian banks use the prime rate for their mortgage offerings, TD Bank currently sets its prime rate marginally higher for variable-rate mortgages. In addition, customers need to be aware that some banks will increase their makeup to counter prime rate changes so that final rates stay the same. Therefore, you may not always save by holding a variable rate mortgage as the bank may not drop your interest rate if the prime rate drops but will certainly increase it if the prime rate jumps up. This happened in March of 2020 when RBC and BMO both chose to increase the markup on their mortgages instead of passing their savings onto customers
Most lenders allow borrowers to convert variable interest rate mortgages into fixed rate mortgages at any point in time. The only drawback is the borrower is responsible for paying the fixed interest at the time the switch occurs.
Canada Bank Prime Rates
Major Canadian banks tend to set their own prime rate alongside the Bank of Canada's target for the overnight rate, but in theory, they could adjust their prime rate if they saw fit.
Scotiabank Prime Rate
The Scotiabank prime rate is 2.45%.
RBC Royal Bank Prime Rate
The RBC Royal Bank prime rate is 2.45%.
TD Bank Prime Rate
The TD Bank prime rate is 2.45%.
CIBC Prime Rate
The CIBC prime rate is 2.45%.
BMO Bank of Montreal Prime Rate
The BMO Bank of Montreal prime rate is 2.45%.
HSBC Prime Rate
The HSBC prime rate is 2.45%.
Prime Rates and How They Affect You
At this point, you might be wondering, how exactly do prime rates impact me? Prime rates dictate how much it will cost you to borrow money from banks and financial institutions. If you’re looking to get a mortgage or another type of financing, understanding prime rates can help you ensure that you’re getting a reasonable deal. It is possible to even strategically time when you apply for financing by applying in a period when prime rates are low. Prime rates will impact your borrowing as a consumer today and ten years from now, it’s good to be mindful of it!
History of Canada's Prime Rate
Canada's prime rate has always stayed very close to the Bank of Canada's target overnight rate. In fact, since the end of the 1990s, the Prime rate has also stayed within 2 percentage points of the Bank of Canada target overnight rate. Historically the prime rate in Canada has stayed below 12% since the creation of the Bank of Canada in 1935 except for a sharp jump in the 1980s due to widespread inflation, a sharp increase in oil prices, and a severe recession that pushed the interest rate to a peak of 21% for a sustained period of time. Since then the prime rate has steadily decreased and for the last three decades has mostly stayed in the single digits.
Canada Prime Rate Forecast for 2021
The Bank of Canada has already lowered its target overnight rate to atone for the recent economic crisis and global pandemic and is not expected to lower it again. Since consumers are expected to continue to spend less the economy will likely remain depressed leaving the rate at its same mark. It is predicted that the BoC target overnight rate will remain at or near its current mark until 2022. Thus, financial consumers can expect the prime rate to stay near its current rate of 2.45% as well. The BoC is not scheduled to review the target overnight rate until January 20th, 2021 so there will not be any changes in the prime rate until then.