What is the Prime Rate in Canada?

The prime rate, formerly known as the prime lending rate, is the annual interest rate that financial institutions charge their most creditworthy corporate customers. However, lenders also use this key interest rate to determine the bank rates for variable loans, prime rate mortgages, and credit cards, among other products. Currently, the prime rate in Canada is 6.60%.

Every bank or lender determines its own prime rates, but they generally follow the benchmark prime rate published weekly by the Bank of Canada. The overnight rate, otherwise known as the policy interest rate, heavily influences prime rates. The overnight rate is essentially the interest rate that banks must pay when they borrow money.

Lenders, like banks, use the prime rate to set interest rates for a variety of loans, including variable rate loans. Typically the interest you pay on these loans will be directly tied to the prime rate and expressed as the prime rate plus a specific percentage. That percentage depends on your credit rating, collateral, and other factors.

The types of loans typically connected to the prime rate include:

• Variable-rate mortgages
• Variable-rate car loans
• Home equity lines of credit (HELOCs)
• Variable rate credit cards

When your mortgage rate is tied to the prime rate, the interest rate you pay will rise and fall alongside the prime rate. This can be of critical importance when you get a mortgage. With a variable mortgage tied to prime, you are betting that your rates will either stay the same or decrease. However, if you suspect rates might rise, you may want to lock into a fixed-rate mortgage, so you’ll know the rate will remain constant throughout the life of the loan. The upside of this option is security. However, the downside is that if the prime rate does go down, you may be paying more in interest than you would have if you took out a variable-rate mortgage.

Here are current prime rates for all of Canada’s big six banks:

Royal Bank of Canada (RBC) – 6.70%

Bank of Montreal (BMO) –6.70%

Scotiabank –6.70%

Toronto-Dominion Bank (TD) –6.70%*

Canadian Imperial Bank of Commerce (CIBC) –6.70%

National Bank – 6.70%

*TD Bank sets a separate mortgage prime rate to base its mortgage interest rates. It is typically 15 base points higher than the standard prime rate and is currently 6.45%

In the late 1970s and early 1980s, prime rates in Canada were extremely volatile and soared to a record high of 22.75 percent in the summer of 1981. However, the prime rates have remained remarkably steady in more recent memory, hovering between two and four percent for the last 10 years.

Here is an example of the prime rates at RBC over the last ten years:

While it is impossible to predict future prime rates with any degree of certainty you can get some insight by paying attention to the Bank of Canada announcements on interest rates. All of Canada’s big banks also publish prime rate forecasts which can provide you with some insight into whether interest rates can be expected to rise or fall in the near future.

Paying attention to prime rates just makes good financial sense. Knowing what these rates are and what direction they may be headed in will allow you to make informed decisions about the lending products that are right for you now, and into the future.