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Canada’s Prime Rate Explained: Impact on Borrowing
What is the Prime Rate in Canada?
The prime rate is the benchmark interest rate that Canadian banks use to set lending rates for their most qualified customers. It serves as the basis for variable-rate products such as mortgages and home equity lines of credit.
The prime rate closely tracks the Bank of Canada’s overnight rate, which reflects the interest rate banks pay when borrowing from one another. Changes to the overnight rate often lead to adjustments in the prime rate, directly affecting borrowing costs for consumers.
How is the Prime Rate Determined?
The Bank of Canada influences the prime rate by adjusting its overnight rate to achieve economic goals like controlling inflation or stabilizing employment. Factors considered when setting the overnight rate include:
- Inflation Levels: Maintaining a 2% inflation target.
- Economic Activity: Tracking employment data and GDP growth.
- Global Conditions: Evaluating trade relationships, currency values, and market stability.
When the Bank of Canada raises or lowers its rate, banks adjust their prime rates accordingly.
Mortgage Rates in Canada
Historical Trends of Canada’s Prime Rate?
Tracking the prime rate over time provides insight into how economic conditions influence borrowing costs.
| Year | Prime Rate (%) | Economic Context |
|---|---|---|
| 2014 | 3.00% | Post-recession recovery. |
| 2016 | 2.70% | Low rates encouraged borrowing. |
| 2018 | 3.95% | Moderate economic growth. |
| 2020 | 2.45% | Pandemic-driven rate cuts. |
| 2022 | 3.95% | Inflation concerns rise. |
| 2024 | 5.95% | High rates to curb inflation. |
How the Prime Rate Affects Borrowing
The prime rate influences many financial products, especially mortgages and lines of credit. Here’s how:
Variable-Rate Mortgages
Variable-rate mortgages are directly tied to the prime rate. When the prime rate increases, monthly payments rise. Conversely, rate cuts reduce borrowing costs, providing savings to homeowners.
Fixed-Rate Mortgages
Fixed-rate mortgages are less affected by immediate changes to the prime rate but are influenced by long-term economic trends tied to the prime rate’s movement.
Lines of Credit and HELOCs
Both personal and home equity lines of credit (HELOCs) are typically variable-rate products. Any increase in the prime rate translates to higher monthly payments for these loans.
How does the prime rate affect the current mortgage rates?
Mortgage rates in Canada come with two main types of mortgage rates variable mortgage rate and fixed mortgage rate. When you get a fixed-rate mortgage, you agree to pay the same rate over the entire term of the mortgage regardless of what happens with the Bank of Canada prime rate. Fixed mortgages are usually a good option if you’re worried about mortgage rates going up or if you want to enjoy paying the same mortgage rate and payment until it’s time to renew your current mortgage.
When you get a variable mortgage rate, this rate will be set as the prime rate minus or plus a certain percentage depending on the Bank. See, as the prime rate goes up or down, which happens when the Bank of Canada rate moves, your variable mortgage rate will go up or down by the same amount typically. Variable-rate mortgages usually come with a lower rate compared to fixed-rate mortgages, but there’s the risk that the mortgage rate could go up (or down) during your mortgage term. The plus side is many banks and lenders, and financial institutions will allow you to convert your variable-rate mortgage to a fixed-rate mortgage at any time during the term of your mortgage, but you will have to pay the current fixed rate as of the time you decide to switch your mortgage.
It is always best to seek advice from a mortgage broker so you have the proper information you need to make the best choice for your mortgage needs.
Historical prime lending rates
Over time, starting in 1935, Canada’s prime rate has moved significantly over the past 70 years. Canada’s Prime rate reached an all-time high of 22.75% in August 1981. That is, in fact, the time as the Bank was frantically hiking interest rates to control runaway inflation here in Canada, this resulted in record-high interest rates for mortgage borrowers. Many homebuyers faced rates of more than 20% on their mortgages.
The Bank of Canada and Canada’s prime rate hit a record low of 2.25% in April 2009. This came during the Financial Crisis when the Bank of Canada quickly dropped its lending rates to near-zero to stimulate the faltering economy during the financial difficulties at the time.
The most prolonged period that prime rate remained unchanged occurred between September 2010 and January 2015, when prime rate sat at 3.00% during this time.
Mortgage Statistics in Canada
The mortgage market in Canada provides valuable insights into borrowing trends:
- Total Residential Mortgage Debt: As of mid-2024, Canadians owe over $2.2 trillion in residential mortgages, reflecting steady growth in homeownership.
- Missed Mortgage Payments: Defaults have increased by 22.7% in early 2024 due to rising interest rates.
- Average Home Prices: Canada’s average home price hovers around $703,446, with regional differences influencing affordability.
Canada prime rate forecast
Canada’s Big Six banks all regularly publish forecasts for the prime rate, generally as far as a year or two into the future each year in their reports.
Based on the average of the latest bank forecasts for the current year, the current expectations for Canada’s prime rate for this year and next year are as follows:
- Year-end 2020: 2.45%
- Year-end 2021: 2.45%
What causes the prime rate to change?
The main factor driving changes to prime rate is inflation expectations. See, the Bank of Canada is required to set monetary policy to achieve a target inflation rate of 2%. This is reviewed each year, and it typically does this by increasing or decreasing its overnight rate bank rate.
When economic models suggest that inflation is falling below the 2% target, the Bank of Canada will cut the overnight rate to stimulate more borrowing, inflation, and economic activity. That usually leads to a lower prime rate set for the Bank of Canada.
When the BoC expects inflation to exceed the 2% target meaningfully, it typically hikes its overnight rate, leading to a higher prime rate.
Getting Approved for a Mortgage in Canada
Securing mortgage approval becomes more challenging when rates are high, but these steps can help:
- Boost Your Credit Score: Aim for a score of 700+ to access better rates.
- Reduce Your Debt: Lower your debt-to-income ratio to below 40%.
- Prepare a Down Payment: Save at least 5%–20% of the home’s purchase price.
- Get Pre-Approved: Lock in a rate before it increases.
Using a mortgage broker from Citadel Mortgages can help you ensure you have some of the best mortgage rates and products.
Documents Needed for Mortgage Approval
To ensure a seamless mortgage application, have these documents ready:
- Identification: Government-issued ID like a driver’s license or passport.
- Proof of Income: Pay stubs, T4s, or tax returns for the last two years.
- Credit Report: A record of your credit history.
- Down Payment Evidence: Bank statements or a signed gift letter.
- Employment Verification: A letter from your employer detailing your role and salary.
FAQs About Canada’s Prime Rate
Mortgage brokers are usually paid a commission by the lender upon the successful placement of a mortgage. This means that, in most cases, their services are provided at no direct cost to the borrower.
Ensure the broker is licensed in your province and is in good standing with the relevant regulatory body. Experience, industry certifications, and positive client testimonials are also important factors to consider.
Consider locking in a fixed rate or increasing monthly payments to pay off your principal faster.
Final Thoughts on canada prime rate
Understanding Canada’s prime rate and its impact on mortgages can help you make smarter financial decisions. Whether you’re buying your first home, refinancing, or managing existing debt, staying informed is key to navigating rate changes.
Compare Mortgage Rates in Canada