Current prime rate in Canada

Canada's prime rate is the benchmark interest rate that major banks use as a reference point for variable-rate lending products - including variable mortgages, HELOCs, student lines of credit, and personal lines of credit. It is not set by legislation or by the Bank of Canada directly; rather, each major bank sets its own published prime rate. In practice, all Big Six banks move in unison with the Bank of Canada's overnight rate announcements.

The current prime rate is 4.45%. This is applied as a baseline: your variable mortgage might be prime minus 0.50% (meaning 3.95%) or your HELOC might be prime plus 0.50% (meaning 4.95%).

Variable-rate mortgages: Your rate is prime ± a spread locked at funding. If prime falls by 0.25%, your rate drops 0.25%. Depending on your mortgage structure, either your payment drops (adjustable-rate mortgage) or more of your fixed payment goes to principal (static payment variable). Each 0.25% change on a $500,000 mortgage equals approximately $65–$70/month.

HELOCs: Almost all Canadian HELOCs are variable at prime + a spread. A 1% rise in prime on a $200,000 HELOC balance adds roughly $167/month to interest charges.

Fixed-rate mortgages: Not affected by prime during the term. Fixed rates are priced from Government of Canada bond yields, not prime. When you renew a fixed mortgage, the rate environment at renewal time will apply.

Variable mortgage rates are directly tied to the prime rate. When the prime rate goes up, so does the interest rate on a variable-rate mortgage. Conversely, when the prime rate goes down, so does the variable rate. The margin relative to prime depends on market conditions, the risk profile of the borrower, and the costs of lending.

When market conditions are positive, the discount margin for the best borrowers can be more than 1.00% below prime. When market conditions are weaker, that margin can be as small as 0.25%–0.50% below prime.

As an example, using today's prime rate of 4.45%, the rate on a variable-rate mortgage might be:

If the prime rate was reduced by 0.25%, the rate on a variable-rate mortgage would become:

The margin of 0.50% stays the same for the term of the mortgage, but your rate moves with every prime rate change.

TD Bank note: TD Bank uses a prime rate for mortgage lending that equals their published prime rate plus 0.15%. They have applied this practice since 2016. Borrowers comparing TD to other lenders should account for this — TD needs to offer a larger discount from their prime rate to match the effective rate offered by competitors.

Predicting where the prime rate will go is difficult. It is influenced by a wide range of factors — inflation, economic growth, employment, global events, and the supply and demand for credit — and, as we saw in 2022, can be subject to sudden and significant changes. Some economists and analysts use models to forecast the future direction of interest rates, but these projections are often imprecise and subject to error.

Ultimately, the direction of the prime rate will depend on whatever combination of economic factors drives the Bank of Canada's rate-setting decisions at each announcement date. Those factors are genuinely uncertain.

Trying to predict the future direction of rates can be a risky exercise for a mortgage borrower. Consider what happened to variable-rate mortgage holders in 2022: many took out variable mortgages when rates were very low and subsequently experienced significant financial stress as prime rose by over 4 percentage points in less than two years. A fixed-rate mortgage would have been the better decision for most of them.

Looking at a variable-rate mortgage purely as an opportunity to benefit from rates declining — without fully considering the risk if rates were to increase — is not a complete analysis. Assess your risk tolerance and understand what happens to your budget if your bet on rates does not work out. Taking interest rate risk is only appropriate for borrowers who can genuinely afford to be wrong.

The Canadian prime rate plays an important role in the country's financial system, serving as a benchmark for variable-rate mortgages, HELOCs, personal lines of credit, and other lending products. While the Bank of Canada does not directly set the prime rate, it has a direct indirect influence on it through its monetary policy. Banks use prime as a basis for setting interest rates on loans and lines of credit, and borrowers with variable-rate products are exposed to interest rate risk.

If you have a variable-rate mortgage, be aware that rates can unexpectedly increase. Variable-rate mortgages contain real risk and are not the right product for everyone. Understanding that risk — and having a plan if rates move against you — is the responsible approach.

If you are currently in the market for a mortgage, a fixed rate offers something valuable: certainty. With no exposure to interest rate risk during the term, a fixed-rate mortgage is the conservative choice for the majority of borrowers who value payment stability. A Frank advisor can model both options side by side so you can make the decision that fits your situation — not a guess.