When you’re considering a new line of credit or a mortgage, your lender’s interest rate — or how much you’ll be charged to borrow the funds — is a key factor in figuring out whether the loan is a good fit with your financial situation.
And if that loan comes with a variable rate, you’ll also need to keep a close eye on the prime rate, which will ultimately determine how much interest you’ll pay over time in addition to repaying the principal amount you borrowed.
What is the prime rate?
The prime rate (also referred to as the prime lending rate) is an interest rate set by large Canadian financial institutions. Their prime rates are based on the Bank of Canada’s overnight or policy interest rate, which is the average interest rate for one-day loans between financial institutions. If the Bank of Canada’s benchmark overnight rate increases, it costs financial institutions more to borrow and lend funds to each other.
The prime rate’s function
The prime rate serves as the basis for the interest rate that lenders will charge for certain loans, such as variable-rate mortgages and car loans, home equity lines of credit (HELOCs) and unsecured lines of credit.
In many cases, you won’t pay the actual prime rate on your loan. Financial institutions typically offer rates in terms of the prime rate plus or minus a certain percentage. And the rate you’re offered depends on conditions in the lending markets and on factors, like your credit, the amount you’re borrowing, and whether the loan is secured or not. (Secured loans are secured by assets or collateral, such as your home, which can result in a lower interest rate.)
Who sets the prime rate in Canada?
The prime rate is set by major commercial financial institutions in Canada, such as the Big Six banks. While each bank sets its own prime rate, major banks’ posted prime rates are often the same.
What is the prime rate now?
After a long period of staying at 0.25%, the Bank of Canada’s policy rate increased markedly in 2022, with the central bank raising its overnight rate six times through the year. The increases are a bid to combat inflation, which climbed to 6.9% in September 2022, according to Statistics Canada — far higher than the bank’s target of 2% inflation.
On Sept. 7, 2022, following the Bank of Canada’s overnight rate hike to 3.25%, most of Canada’s major banks — including the Royal Bank of Canada and TD Bank — raised their prime rates to 5.45%
How often does the prime rate change?
The prime rate has the potential to change eight times a year, in line with the Bank of Canada’s eight fixed annual announcements to announce policy interest rate decisions. In 2022, the prime rate has been raised six times after Bank of Canada announcements.
Where to find the daily prime rate online
The Bank of Canada’s website provides a daily digest that includes the current overnight rate, as well as other financial information, such as Government of Canada bond yields and exchange rates. Each of the large financial institutions post their prime rates on their websites, often on pages specific to relevant borrowing products.
How the prime rate impacts interest rates for borrowing money
The prime rate has a direct correlation with rates lenders charge for a number of loans and lending products.
Variable-rate loans (mortgages and auto loans)
As their name suggests, the interest on variable-rate loans, including some types of mortgages and car loans, is tied to prime interest rates. When the prime rate goes up (or down), the interest rate on your loan changes accordingly.
But if your lender’s prime rate goes up, it doesn’t necessarily mean your monthly payment will increase. Often your payment may remain the same, but more of your repayment amount could end up going towards interest, rather than the principal, which means it may take you longer to pay off the loan. Before taking out a variable-rate loan, make sure you fully understand how the interest rate can change and how it might affect your payments.
Lines of credit (including HELOCs)
With a line of credit, including a HELOC — a secured form of credit where your home is used as the guarantee that you’ll pay back the funds you borrowed — an increase in the prime rate could bump up the interest rate you pay on any outstanding balance, likely resulting in higher monthly interest payments.
Similarly, the interest rate on unsecured lines of credit, such as a personal line of credit, are generally tied to the prime rate, so the interest you pay on your balance changes when the prime rate rises or falls. This interest rate may change without advance notice whenever the prime rate fluctuates.
Many credit cards charge a fixed rate of interest that isn’t linked to the prime rate. However, some credit cards do link their interest rates to the prime rate, charging variable rates that are often described as “prime plus” a certain percentage of interest that depends on your credit rating. If the prime rate goes up, any monthly interest payments on outstanding balances will also increase.
For example, a credit card may charge interest on purchases and cash advances at a rate of prime + 4.99% to 8.99%. Customers with a better credit rating typically receive a lower rate. However, if the prime rate goes up, so could your interest payment — regardless of your creditworthiness.
History of the prime rate in Canada
Between 2017 and the start of the COVID-19 pandemic in 2020, the average prime rate ranged between 2.7% and 3.95%. In March 2020, financial institutions — in response to the Bank of Canada’s move to lower the target overnight rate to 0.25% to support the Canadian economy during the pandemic — decreased the prime rate three times that month until it reached 2.45%, where it stayed until March 2022.
Historically, the prime rate hit a record high of 22.75% in 1981 and fell to a low of 2.25% in 2009.
|Effective Date||Target Overnight Rate||Change
|Sept. 6, 2022||5.45%||0.75%|
|July 13, 2022||4.70%||1.00%|
|June 1, 2022||3.70%||0.50%|
|April 13, 2022||3.20%||0.50%|
|March 2, 2022||2.70%||0.25%|
|March 29, 2020||2.45%||-0.50%|
|March 16, 2020||2.95%||-0.50%|
|March 4, 2020||3.45%||-0.50%|
|Oct. 24, 2018||3.95%||0.25%|
|July 11, 2018||3.70%||0.25%|
|Jan. 17, 2018||3.45%||0.25%|
|Sept. 6, 2017||3.20%||0.25%|
For now, yes. In early 2022, the Bank of Canada indicated that it planned to raise the policy rate (the overnight rate) this year in order to get inflation back to its 2% target.
On April 13, 2022, for example, when the Bank of Canada raised the overnight rate by 50 basis points to 1%, several large Canadian banks raised their prime rates to 3.2%. Since April, the Bank of Canada has raised the overnight rate four times in a bid to combat inflation. The most recent increase, on Oct. 26, 2022, brought the overnight rate to 3.75% and the banks’ prime rates to 5.95%.
If the prime rate were to go down, the cost of paying interest on variable-rate loans, such as mortgages or lines of credit, would also decrease. As a result, more of each payment would go towards your loan’s principal instead of the interest. Lower rates also mean it costs less to borrow money, which encourages people to spend more and boosts the economy.