After a long pause in hikes, prime rates in Canada are on the move again. As of April 13, 2022, the prime rate is 3.20%, increasing by 50 basis points.
The prime rate was pegged at 2.45% for a while after the pandemic hit Canada in 2020.
At the time, the only other time in recent history that the prime rate has fallen below 2.50% was in April 2009 during the thick of the financial crises.
What is the prime rate in Canada 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 1.00%, a further increase from the 0.25% it had stayed at since 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 0.50%, the prime rate was 2.70%. When the overnight rate increased by 50 basis points (bps) to 1.00%, the prime rate also increased to 3.20% (+0.50%).
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 2022, the interest rate announcements are set for January 26, March 2, April 13, June 1, July 13, September 7, October 26, and December 7.
Current Prime Rate for Canada’s Banks
The current prime rate for banks in Canada are:
|TD prime rate*||3.20%|
|RBC prime rate||3.20%|
|Scotiabank prime rate||3.20%|
|CIBC prime rate||3.20%|
|BMO prime rate||3.20%|
|National Bank prime rate||3.20%|
|HSBC prime rate||3.20%|
|Tangerine prime rate||3.20%|
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 3.20%, this means your mortgage rate is 2.80% (i.e. 3.20 – 0.40%).
If the overnight rate rises by 50bps to 1.50% and the prime rate becomes 3.70%, your effective variable mortgage rate rises to 3.30% (i.e. 3.70% – 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 4.20%.
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.
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, stimulates economic activity when inflation rates fall below target.
Lastly, a change in the overnight rate can affect the exchange rate of the Canadian dollar.
Related: Best mortgage rates in Canada.
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.
|Date||Bank Prime Lending Rate Canada|
- Tangerine TFSA Accounts and Rates
- Best RRSP Savings Account Rates
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- RRSP and TFSA Bank Transfer Fees
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Canada Prime Rate FAQs
What is Canada’s Prime Rate?
The current prime rate in Canada is 3.20%
Will mortgage rates rise in Canada in 2022?
Yes, chances are that mortgage rates will increase in 2022 as the Bank of Canada increases its policy interest rate. Variable-rate mortgages respond to changes in the prime rate. When the prime rate rises, variable mortgage rates increase and they drop when the prime rate goes down.
What is the Bank of Canada’s Prime Rate?
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 1.00%.
When will the Prime Rate change?
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 dates for 2022 are January 26, March 2, April 13, June 1, July 13, September 7, October 26, and December 7.
Have questions about the prime rate? Leave them in the comments.