Prime Rate in Canada: What Does It Mean?

Believe it or not, lenders don’t conjure up your loan interest rate without any forethought or consideration. In reality, a lot of calculations go down behind the scenes to produce the percentage you see on your contract. 

Besides your credit score, one of the dominating factors in the interest rate of your loan is called the prime rate. 

Care to learn about the prime rate in Canada? 

Stick around for details!

What Is the Prime Rate in Canada?

Essentially, the prime lending rate in Canada is the interest rate that banks, credit unions, and independent lenders use to determine the rates for the loans and lines of credit they offer. This includes everything from credit card rates, variable-rate mortgages, car loans, and whatever else you can think of. 

Although you might not hear about the Canada prime rate in your daily life, it impacts you a lot more than you’d imagine.

The Bank of Canada (BoC) sits at the core of the operation. 

Basically, the BoC sets policy interest rates, i.e. target overnight rates that influence the fluctuations in the prime rate. Prime rates and target overnight rates are not the same, but they are closely related in that when the bank changes the overnight rate, lenders consequently adjust their prime rates.

Essentially, the prime rate is the baseline upon which other rates are negotiated, which is probably why it’s called the “prime”. So, if the prime rate moves up, so will your loan interest, and if it moves down, your loan rates will follow. 

Even though all other banks set their own prime rate, the top banks, i.e. the so-called Big Five Banks usually have the same rate and still follow the BoC. 

If the other banks don’t raise their respective prime rates after the BoC, it will become more expensive for them to borrow money. Consequently, they need to increase their rates to make up for the added costs.    

What Is The Current Prime Rate in Canada?

At the time of writing, the prime rate in Canada is 6.45%. 

On December 7, 2022, the Bank of Canada raised the target overnight rate by 50 basis points, from 3.75% to 4.25%, resulting in a prime rate increase from 5.95% to 6.45%.

This year, the bank has increased the target overnight rate 7 times in a concerted effort to combat inflation rates. And because of inflation, the prime rate in Canada has only had an increase. In fact, the last decrease happened back in March 2020. 

Because the prime rate changes frequently, some Canadians find it hard to keep pace with the updates, especially since rarely anyone talks about increasing prime rates with friends. But if you want to stay up-to-date, it’s best to follow the official report of the Bank of Canada. 

And for a clear chronological view of the rate changes so far and an insight into the US prime rate, head to ICICI Bank.         

How Does the Prime Rate Affect Borrowing Money?

Since the Canada prime rate is the baseline upon which financial institutions set interest rates, the percentages affect everyday loans, including:

Variable Loans

Many lenders offer mortgage rates with a more flexible term, which base their interest rates on the current prime rate. So, as the prime rate changes, so do mortgage rates with variable interest. 

This could be beneficial for Canadians every time there’s a drop in the target overnight rate, but as the rates have only been going up, so have the variable mortgage loans. 

However, the rates for variable loans don’t only depend on the prime rate. In fact, they also take a borrower’s credit score and mortgage insurance into consideration. Head to our article about the top Canadian mortgage rates on the market for our favourite picks.  

Lines of Credit

Home Equity Lines of Credit (HELOC) almost always base their rates on the current prime rate in Canada. Usually, HELOCs add 0.50% to the prime rate to produce their interest rates. 

For example, with a prime rate of 6.45% at the time of writing, many HELOCs will lend at a 6.95% rate, which enables lenders to make a profit on the loan. 

Credit Cards

Although not all credit cards set their interest depending on the prime rate, some do. Unsecured credit cards that aren’t backed by an asset usually come with higher interest rates to make up for the additional risk the lender is taking.

For some cards, like the RateAdvantage Visa by RBC, you might see interest rates of “Prime+4.99%”. This means that you get an additional 4.99% of interest on the current prime rate, which comes to a rate of approximately 11.44%. 

Of course, credit card lenders also consider your credit score, employment status, and overall financial situation.  

History of the Prime Rate in Canada

Unsurprisingly, the Bank of Canada prime rate history is long and a bit complicated, displaying many ups and downs. Some of the most noteworthy years for the prime rate include: 

• The Conception of Canada’s Central Bank (1935) – as a response to the economic conditions of the Great Depression, the Royal Commission opened the bank as a private institution and sold its shares to public investors, after which it was nationalized by the Bank of Canada Act in 1938.
• The Great Depression and WWII (1935-1945) – the first rate (not officially the target overnight rate) of 2.5% in 1935 decreased to 1.5% in 1945 as the economy strengthened, employment surged, and businesses began borrowing and investing in new manufacturing plants and housing during the war.
• The Post-War Period (1945-1955) – rates rose for the first time in years in October 1955 and hit 2.0%, which promoted new investments in manufacturing, infrastructure, consumer goods, and housing. 
• Stagflation (1977-1991) – the prime rate continued to rise slowly and hit double digits of 10.25% for the first time in October 1978, which was due to the global oil crisis and the OPEC oil embargo and led to record-high rates of 20.03% in August 1981.
• Economic Recovery (1991-2008) – with a few exceptions, the target overnight rates were declining after the recession of the 1980s, and the Bank of Canada introduced the inflation-target rate. 
• The Great Financial Crisis (2009-2017) – for the first time in years, the rate dropped to 0.5% in March 2009 as a response to the crisis, while Canada’s oil-driven export economy was undergoing a recession and witnessing rates falling from 1.25% to 0.75% in 2015. 
• Inflation and COVID-19 (2018-present) – due to low inflation, the target overnight rates stagnated at 1.75% for 2 years until they dropped by 50 basis points in March 2020, leading to an eventual low of 0.25% throughout the rest of 2020 and 2021, before shooting back up in early 2022. 

Let’s see how the prime lending rate in Canada has changed in detail over the last few years:

Date of Change	Target Overnight Rate	Prime Rate
March 4, 2020	1.25%	3.45%
March 16, 2020	0.75%	2.95%
March 27, 2020	0.25%	2.45%
March 3, 2022	0.50%	2.70%
April 14, 2022	1.0%	3.20%
June 2, 2022	1.50%	3.70%
July 14, 2022	2.50%	4.70%
September 8, 2022	3.25%	5.45%
October 27, 2022	3.75%	5.95%
December 8, 2022	4.25%	6.45%

Note that the target overnight rate, and hence the prime rate, didn’t change at all for 2 years, from March 2020 to March 2022, likely due to the pandemic. 

Canadian Prime Rate Forecast

The rapid rise in interest rates in 2022 was evidently due to record-high inflation rates in Canada and worldwide. However, the Canada prime rate forecast looks bright for 2023, with analysts expecting inflation rates to subside, and with that, the prime rates either won’t change or might even decrease. 

Taking the great recession of 2008 into consideration, we have the foresight to notice how the financial system and the economy required a bailout just to keep running. Luckily, after rebounding, the economy has been steady for over 10 years.  

Similarly, during the pandemic, we witnessed the same bailouts and staggering inflation rates. But now, as the economy is picking itself back up again, we expect stabilization. 

In fact, the Royal Bank of Canada predicted the most recent increase, and based on their projections, we could potentially see one more increase and a final cool-down by March or April 2023. 

Although forecasting and speculation are vital for planning, all predictions are based on historical data and other factors and don’t represent fact. So, take every projection with a grain of salt. 

Conclusion 

The prime rate in Canada has a significant bearing on the average Canadian’s life, especially those looking for mortgages or other loans. Therefore, it’s wise to become familiarized with the concept before making potentially life-altering decisions. 

By doing so, you have the tools needed to discern how affordable a loan is and whether or not you can or should wait for a change in the target overnight rate. 

Nowadays, you’ve got all the information with just a search query, so use it to your advantage!