Following three rate cuts in a row in March 2020, the prime lending rate in Canada is currently at 2.45%.
The prime rate fell from its previous level of 3.95% as the bank of Canada accelerated cuts to its overnight rate in order to boost the economy and minimize the financial impact of the pandemic.
The only other time in recent history that the prima rate fell below 2.50% was in April 2009 during the thick of the financial crises.
What is the prime rate and how does it impact your wallet? Read on to find out.
What is the Prime Rate?
The prime rate is the interest rate that banks and other financial institutions use as a starting point for their variable interest rate products.
Examples of financial products that rely on the prime interest rate include:
- Variable-rate mortgages
- Lines of credit
- Variable-rate personal, business, and car loans
- Home Equity Lines of Credit (HELOC)
- Variable-rate credit cards
How is the Prime Rate Determined?
Banks revise their prime rate based on the Bank of Canada’s policy interest rate aka “target for the overnight rate,” or “key interest rate.”
The overnight rate is what it costs banks to lend money to each other overnight. This rate is set by the Bank of Canada at a level that matches the prevailing monetary policy, level of inflation, and economic performance.
The current target for the overnight rate is 0.25%, falling from a high of 1.75% at the beginning of 2020. Generally, when the overnight rate falls, banks lower their prime rate by the same amount and vice versa.
For example, when the overnight rate was 1.75%, the prime rate was 3.95%. When the overnight rate dropped 150 basis points (bps) to 0.25%, the prime rate fell to 2.45% (-1.50%).
Analysts wait on the Bank of Canada’s announcements all through the year (eight fixed days) to learn about changes to the key interest rate.
For 2020, the interest rate announcements are set for January 23, March 4, April 15, June 3, July 15, September 9, October 28, and December 9.
Current Prime Rate for Canada’s Banks
The current prime rate for banks in Canada are:
TD prime rate*
RBC prime rate
Scotiabank prime rate
CIBC prime rate
BMO prime rate
National Bank prime rate
HSBC prime rate
Tangerine prime rate
*TD’s mortgage prime rate is 2.60%.
Attention is usually directed at how the Big 6 (RBC, BMO, Scotiabank, CIBC, TD, and National Bank) react to a change in the overnight rate and the impact on their published prime rate.
While the banks typically follow in lockstep to adjust their prime rates by an equal amount, this is not always the case.
Impacts of the Prime Rate on Your Finances
The prime rate affects variable rates and your cost of borrowing. Financial products that are immediately impacted include variable-risk mortgages, personal loans, lines of credit, HELOCs and credit cards with variable APRs.
For example, your bank may advertise a 5-year variable mortgage loan (closed) as Prime – 0.40%. At the current prime rate level of 2.45%, this means your mortgage rate is 2.05% (i.e. 2.45 – 0.40%).
If the overnight rate rises by 50bps to 0.75% and the prime rate becomes 2.95%, your effective variable mortgage rate rises to 2.45% (i.e. 2.95% – 0.40%).
For comparison sake and for the same mortgage length, the bank’s variable “open” mortgage rate may be listed as Prime + 1.00% which is equivalent to an effective mortgage rate of 3.45%.
Compared to fixed interest rate products that stay the same throughout the term, variable rate loan products will rise and fall in tandem with the prime rate.
Find the best mortgage rates in Canada.
Banks may also vary the rates they pay on savings accounts when the overnight rate changes. During the recent emergency rate cuts, the savings accounts rates offered by many of the big banks effectively fell to 0%.
This is in line with the monetary policy objective of the Bank of Canada in which a lower interest rate on loans, mortgages, savings, etc., directly and indirectly, stimulate economic activity when inflation rates fall below target.
Lastly, a change in the overnight rate can affect the exchange rate of the Canadian dollar.
Prime Rate History in Canada
Below is a chart showing the history of prime rates in Canada over the last 10 years (hover or click to see rates).
If you are interested, I have also included a table showing how the prime lending rate for Canada’s chartered banks fared during the same time period.
- Best Scotiabank Savings Accounts
- Tangerine TFSA Accounts and Rates
- Best RRSP Savings Account Rates
- Best TFSA GIC Rates in Canada
- RRSP and TFSA Bank Transfer Fees
The current prime rate in Canada is 2.45%
Variable-rate mortgages respond to changes in the prime rate. When the prime rate falls, variable mortgage rates drop and they rise when the prime rate goes up. It’s anyone’s guess where long-term rates are headed. The general prediction is that mortgage rates will remain low through 2020-2021 as the Canadian economy attempts to recover to pre-COVID19 levels.
The prime rate is actually set by banks/lenders and not the Bank of Canada (BOC). Financial institutions base their prime lending rate on the overnight rate set by the BOC. The BOC’s target for the overnight rate is currently set at 0.25%.
The Bank of Canada makes interest rate announcements eight times a year. They can change the overnight rate during these announcements and that impacts the prime rate. The remaining dates for 2020 are July 15, September 9, October 28, and December 9.
Have questions about the prime rate? Leave them in the comments.