When you apply for one of these variable rate loans and financial products, the interest rate will be set to the Prime rate plus or minus a number called a delta. You can think of this as a markup or discount. Although all variable rates are based on Prime, lenders can choose to set their own markup or discount based on the type of loan and the credit-worthiness of the borrower.
Variable interest rates are normally described as "Prime" plus or minus a delta (the markup or discount). This delta is usually expressed in percentage points. An example variable rate with a delta of 1% would be described as "Prime + 1%". Prime can also be abbreviated as "P" and be described as "P + 1%".
What kind of rate and delta you get depends on many factors including the type of loan or financial product you are applying for, your credit score, and your financial situation. Riskier financial products like unsecured credit cards will tend to have large positive deltas and higher rates whereas secured loans like mortgages and HELOCs will have lower rates and small or even negative deltas.
RBC Royal Bank's Prime rate is currently 2.45%.
RBC Royal Bank's Prime rate was changed to 2.45% from 2.95% on March 30, 2020.
Scotiabank's Prime rate is currently 2.45%.
Scotiabank's Prime rate was changed to 2.45% from 2.95% on March 30, 2020.
TD Bank's Prime rate is currently 2.45%.
TD Bank's Prime rate was changed to 2.45% from 2.95% on March 30, 2020.
CIBC's Prime rate is currently 2.45%.
CIBC's Prime rate was changed to 2.45% from 2.95% on March 30, 2020.
BMO Bank of Montreal's Prime rate is currently 2.45%.
BMO Bank of Montreal's Prime rate was changed to 2.45% from 2.95% on March 30, 2020.
HSBC's Prime rate is currently 2.45%.
HSBC's Prime rate was changed to 2.45% from 2.95% on March 31, 2020.
Each bank or lender determines their own Prime rate. Banks in Canada usually look to the target overnight rate, or the Policy Interest Rate set by the Bank of Canada (BoC). Changes in the target overnight rate are usually followed by similar changes in Prime rates. As a result, most banks and lenders in Canada have similar Prime rates.
If you borrow money, you are affected by the Prime rate. The interest rates of many lending products are based off the Prime rate and may go up or down when the Prime rate changes.
Some credit cards set their interest based on the Prime rate. Because they are not backed by an asset like a house or car, they are unsecured and will usually have high interest rates to make up for the additional risk. RBC's RateAdvantage Visa, for example, has an interest rate of "Prime + 4.99%" to "Prime + 8.99%".
Other variable rate credit cards include TD's Emerald Flex Rate Visa and National Bank's Syncro Mastercard.
HELOCs are almost always variable rate and based on the Prime rate. A common delta for HELOCs is +0.50%. This is described as "Prime + 0.50%" or "P + 0.50%". If the current Prime rate is 2.45%, then the rate for a HELOC at "Prime + 0.50%" would be 2.95%.
Variable rate mortgages are offered by many lenders and their interest rates are based on the Prime rate. These mortgages are "variable rate" because their interest rates can change if the Prime rate changes. Your rate will depend on your specific mortgage, property, and financial situation. Having a good credit score and mortgage insurance can usually get you the lowest mortgage rates.
TD Bank uses a different Prime rate for its mortgages. It is currently set to 2.65% compared to its regular Prime rate of 2.45%.
Some car and auto loans have variable interest rates that are based on the Prime rate. Although they are considered secured loans, they usually have higher interest rates than mortgages. Some car dealers and manufacturers may offer special promotions, however, for low or even zero interest rates.
If you have or are considering getting a variable rate mortgage, it is important to know how changes in the Prime rate can affect your mortgage's interest rate.
If you already have or have been pre-approved for a variable rate mortgage, your mortgage interest rate has been fixed at the Prime rate plus or minus a certain rate. Your mortgage interest will then directly follow the Prime rate up or down.
For example, if your variable rate mortgage is set at Prime + 0.2% and the current Prime rate is 2.45%, then your current mortgage rate is 2.65%. If the Prime rate goes up by 0.2 percentage points to 2.65%, then your mortgage rate will increase by the same amount to 2.85% (2.65% + 0.2%).
Most variable rate mortgages have fixed payments. This means that even if your interest rate changes, your regular payments will stay the same. However, the amount of money from each payment that goes to pay off interest and the amount of money that goes towards your principal will change.
If the Prime rate goes up, your mortgage rate wil increase and more of your payment will go towards interest and less will go towards your mortgage principal. This could mean that you pay off your mortgage slower and end up with more of your mortgage remaining at the end of your term.
if the Prime rate goes down, your mortgage rate will decrease and less of your payment will go towards interest and more will go towards your mortgage principal. This could mean that you pay off your mortgage faster and end up with less of your mortgage remaining at the end of your term.
If you plan to consider a variable rate mortgage in the future, you should know how the Prime rate affects your potential mortgage rate. As a variable rate, your potential mortgage rate will follow the Prime rate up and down. An increase in the Prime rate could make a variable rate mortgage more expensive than a similar fixed rate mortgage. Similarly, a decrease in the Prime rate could make a variable rate mortgage cheaper than a similar fixed rate mortgage.
Although variable rate mortgages are all based on the Prime rate, there is a modifier that lenders can set. This modifier determines how much higher or lower the variable rate is relative to the Prime rate. Think of it like a markup or discount - everybody uses the same original price, but lenders can set their own prices with a markup or discount. Even if the Prime rate goes down, lenders can choose to set a larger markup so their variable rates don't change.
This happened in March, 2020 when the banks followed the Bank of Canada's rate cut and dropped their Prime rates from 2.95% to 2.45%. Some banks including RBC and BMO then increased the markup on their variable rate mortgages so that their final rates stayed the same. This shows that you always have to do your research and check if you're really getting a good deal.
|Date||Prime Rate||Change||Target Overnight Rate|
|April 1st 2020||2.45%||-0.50||0.25%|
|March 18th 2020||2.95%||-0.50||0.75%|
|March 11th 2020||3.45%||-0.50||1.25%|
|October 31st 2018||3.95%||0.25||1.75%|
|July 11th 2018||3.7%||0.25||1.5%|
|January 24th 2018||3.45%||0.25||1.25%|
|September 13th 2017||3.2%||0.25||1%|
|July 19th 2017||2.95%||0.25||0.75%|
|July 22nd 2015||2.7%||-0.15||0.5%|
|January 28th 2015||2.85%||-0.15||0.75%|
|September 15th 2010||3%||0.25||1%|
|July 21st 2010||2.75%||0.25||0.75%|
|June 2nd 2010||2.5%||0.25||0%|
Canada's Prime rate in 2018 rose from 3.45% to 3.95% as the Bank of Canada raised its target overnight rate from 1.25% to 1.75%. Global economic growth was projected to be strong at 3.75% for the year and Canada's economy ran at near capacity with rising housing markets and high oil prices. Combined with a lower Canadian dollar, inflation was edging above the Bank of Canada's target of 2%. In response to inflation and strong economic growth, the Bank of Canada raised interest rates to keep inflation within their target range.
Canada's Prime rate in 2019 remained stable at 3.95% as the Bank of Canada maintained its target overnight rate at 1.75%. Despite increasing asset prices with the S&P/TSX Composite index growing 19% in 2019 and stable global economic growth, pressures from Canada's lagging energy sector and uncertain trade relationships with US and China created a headwind to further tightening of monetary policy and rising interest rates.
Canada's Prime rate in 2020 quickly dropped to 2.45% by the end of the first quarter as the Bank of Canada lowered its target overnight rate from 1.75% to 0.25% in response to economic pressures caused by COVID-19. Canada's GDP fell by by 7.5% in March followed by a record-breaking 11.6% in April. Although the Bank of Canada is scheduled for three more policy meetings this year, they have signalled that they do not expect to raise rates until at least 2022.
The Prime rate has a very close relationship with the Bank of Canada target overnight rate. Since the late 1990s, the Prime rate has stayed within a 50 basis point range around 200 basis points (2 percentage points) above the Bank of Canada rate. In the US, the WSJ's Prime rate index has stayed exactly 300 basis points above the Federal Reserve's Fed Funds Rate for the past two decades.
One major reason why the Prime rate tends to follow the Bank of Canada target overnight rate is because the rate influences a bank's cost of funds, or the amount of money they have to pay in order to get cash. Banks lend to each other using the overnight rate.
If the overnight rate goes down, the banks' cost of funds also goes down. With cheaper cash, the banks can pass on the savings to their customers by lowering their Prime rate in order to remain competitive with other lenders.
If the overnight rate goes up, the banks' cost of funds also goes up. Since they have to pay more for their cash, the banks have to raise their Prime rate.How the Overnight Rate Works
The Bank of Canada was created as part of the Bank of Canada Act in 1935. It was recommended by the Royal Commission in response to the economic conditions of the Great Depression. In March 1935, the Bank of Canada was opened to the public as a private institution with shares sold to public investors. It was quickly nationalized as a public institution by an amendment to the Bank of Canada Act in 1938.
The Bank of Canada rate (not officially the target overnight rate until much later in the century) started at 2.5% in 1935 and ended at 1.5% in 1945. The economy strengthened during the war as Canada played a vital role in supplying natural and manufactured resources to the Allies. There was also increased employment, especially of women. The decrease in the Bank of Canada rate encouraged people and businesses to borrow money to invest in new manufacturing plants and housing.
After World War II, the Bank of Canada rate did not rise until October 1955, when it was changed to 2.0%. This low-interest rate environment promoted investment in new infrastructure, manufacturing, housing and consumer goods.
After the upward change in 1955, the Bank of Canada rate continued to rise slowly throughout the 1960s and early 1970s. In October 1978, the benchmark rate hit double digits for the first time at 10.25%. This was due in part to the global oil crisis and the OPEC oil embargo. With record-high prices for oil in August 1980 that continued into 1981, the Bank of Canada rate hit an all-time high of 20.03% in August 1981. The lowest rate reached during this period was 7.14% (March 1987).
After the recession of the 1980s, the Bank of Canada rate between 1991 – 2009 generally went downwards with only a few exceptions. The inflation-target rate was introduced at the beginning of this period.
In March 2009, the BOC rate dipped below 1% for the first time to 0.5% in response to the Great Financial Crisis. Despite a minor recovery, in 2014, oil prices dropped a staggering 60%, causing a recession in Canada's oil-driven export economy. The Bank of Canada rate then dropped from 1.25% to 0.75% in 2015.
Despite widespread economic growth, 2018 and 2019 were marked by continued low inflation, preventing the Bank of Canada from raising rates any higher than 1.75%. This was quickly reversed with the impact of COVID-19 with a two 50 basis point drops in March 2020. The Bank of Canada rate now lies near its lower limit at 0.25% and is unlikely to be raised anytime soon due to the deflationary impact of reduced consumer spending and distressed economy.
The Bank of Canada held its 7th meeting of the year on July 15, 2020. Highlights from the meeting include:
Their rate decision aligns with our forecast for the Bank of Canada rate. Our models continue to show that the Bank of Canada target overnight rate is likely to remain at 0.25% until 2022.
Recent events have led the Bank of Canada to lower their Target Overnight Rate. Canadian banks have followed in tandem by decreasing their prime rates to a current low of 2.45%. We believe that due to the depressed economy and deflationary consumer spending environment, the Bank of Canada's Target Overnight Rate will remain near current levels for until 2022. Subsequently, Canadian bank Prime rates will likely continue to remain near current levels as well.
The Bank of Canada is scheduled to meet on September 9th, 2020 to review its Target Overnight Rate. If it chooses to change the Target Overnight Rate, bank Prime rates will likely follow in the same direction.
Prime Rates in the US are similar to those in Canada. They are the base rate used by banks to determine the interest rate for loans to borrowers with good credit. They also follow the overnight rate set by central banks - in the case of the US, that would be the US Federal Reserve. In contrast to Canada, the US banking sector is diverse and distributed amongst thousands of banks. Subsequently, Prime rates in the US can vary significantly from bank to bank and region to region.
The Wall Street Journal (WSJ) publishes a Prime rate index that follows the base rate on corporate loans by at least 7 of the 10 largest US banks.
As of June, 2020, the WSJ's Prime Rate Index is at 3.25%
While we try our best to get your the best rates, we cannot guarantee that they are always accurate. WOWA assumes no liability for the accuracy of the information presented, and will not be held responsible for any damages resulting from its use.