Prime Rate Canada

The prime rate is most commonly defined as the interest rate commercial banks charge their most credit-worthy customers. It serves as a benchmark rate for setting the rates on a variety of financial products, including mortgages, personal loans, and lines of credit. The prime rate is influenced by several factors, including inflation, economic growth, and the supply and demand for credit.

The prime rate is determined by the banks themselves, and it is typically set at a level that is 1.5 to 2.5 percentage points above the overnight lending rate set by the Bank of Canada. The prime rate has been declining in recent months and is currently (as of January 29, 2025) 5.20%.

Each Canadian bank sets their own prime rate. They generally end up being the same rate, with no difference between the banks. Independent mortgage lenders do not set their own prime rate. They reference one or more of the big banks and use their prime rates as their reference prime rate.



The Bank of Canada's monetary policy is a key determinant of the prime rate even though it does not directly set it. The Bank of Canada uses its benchmark overnight lending rate to regulate the nation's economic growth and restrain inflation. The Bank of Canada influences short-term interest rates by adjusting the target for the overnight rate on eight fixed dates each year.

When the Bank of Canada changes the overnight rate, the Canadian banks usually change their prime rates within a couple days. They tend to move their prime rates by the same amount and in the same direction that the Bank of Canada moves the overnight lending rate.

Banks use the prime rate as a benchmark rate for a variety of financial products, including mortgages, personal loans, and lines of credit. The interest rate charged for these products is typically set at a margin above or below the prime rate. Most products will have a rate of Prime plus a margin but variable rate mortgages for the best borrowers are usually priced at Prime minus a margin. For example, a bank might offer a variable-rate mortgage at a rate of prime minus 1% (equal to 4.20% today). As the Prime Rate moves up or down the variable mortgage rate will move also, but the margin stays the same for the term of the mortgage.

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 interest rate on a variable rate mortgage. This means that borrowers with variable rate mortgages are exposed to interest rate risk, as their mortgage payments can increase if the prime rate increases.

The margin relative to the prime rate depends on market conditions, the risk profile of the borrower and the costs of lending. When market conditions are positive, the margin for the best borrowers can be as much as minus 1.50%. When market conditions worsen, that margin can be as small as 0.25% to 0.50%.

As an example, using today’s prime rate, the rate on a variable rate mortgage might be 4.20%:

5.20% - 1.00% = 4.20%

If the prime rate was reduced by 0.25% to 4.95%, the rate on a variable-rate mortgage would become:

4.95% - 1.00% = 3.95%

The margin of 1.00% stays the same for the term of the mortgage but the mortgage rate will change when the prime rate changes.

The prime rate is usually the same for all banks. They will use this base prime rate for pricing variable rate mortgages and the competitive difference in rate is the margin below the prime rate that they offer. However, there is one bank that does things differently. TD Bank uses a prime rate for mortgage lending that is equal to their prime rate plus 0.15%. They have been doing this since 2016. Borrowers should note this since TD needs to offer a larger margin discount to their prime rate to get you to the same rate being offered by other lenders.

The prime rate fluctuates over time. There have been significant increases in the past, primarily due to central bank efforts to tame inflation, very similar to what happened in Canada in 2022. The current prime rate seems very high but is it really that high when compared to the past? The answer is yes, when you compare it to recent history. However, the business and interest rate cycles run over a long time period and when you look back further in history, today’s prime rate looks fairly normal:

The historic margin between variable mortgage rates and the prime rate has varied over time. In general, the margin tends to be a discount ranging between 0.5% and 1.5%, depending on market conditions and the risk profile of the borrower. During times of economic uncertainty or when credit conditions are tight, banks may offer less of a discount margin to account for increased risk.

Predicting where the prime rate will go in the future is difficult. It is influenced by a wide range of factors and, as we saw in 2022, can be subject to sudden 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 a variety of economic factors that influence the rate setting policy of the Bank of Canada, including inflation, economic growth, and the supply and demand for credit.

Trying to predict the future direction of interest rates can be a risky exercise for a mortgage borrower. Just look at what happened to variable-rate mortgage holders in 2022. Many took out variable rate mortgages when rates were very low and are now experiencing financial stress due to higher rates. A fixed-rate mortgage would have been a better decision. Looking at a variable-rate mortgage as an opportunity to benefit from rates declining without considering the risk if rates were to increase is a poor analysis. The best analysis for most of us is to find the rate that we can afford that we can lock-in for as long as possible. Making a bet on Interest rates is arguably inappropriate for a homeowner that is trying to secure financing for their house. It is a material risk. Assess your risk tolerance and understand what happens if your bet on rates does not work out. Taking interest rate risk is only appropriate for the minority of us that can afford to be wrong.

The Bank of Canada has cut its target overnight lending rate on January 29 by 0.25%, bringing it down to 3.0%. In response, the prime rate at the banks will decline to 5.20%. This first rate cut of 2025 comes after 1.75% in interest rates cuts in 2024, and is welcome news for mortgage borrowers.

This is a smaller cut than their last two cuts of 0.50%. Analysts still expect more cuts in 2025 but the frequency of the rate cuts will be slower and no jumbo cuts are expected. The outcome of the tariff issue may change that outlook, but that is the general consensus today.

The prime rate and variable mortgage rates will decline by 0.25%, bringing some relief to variable-rate mortgage holders. Variable mortgage rates are now only slightly higher than fixed mortgage rates, making the decision to choose a variable mortgage rate easier for those inclined to take that risk. With the additional rate cuts that are anticipated we could soon see a more typical rate environment where variable rates are below fixed rates, perhaps into the mid-3% range by the end of the year.

Fixed mortgage rates are based on bond yields and they have remained relatively stable over the past few months. Bond yields are now about 0.10% lower than they were on Jan 1. Some movement lower in fixed mortgage rates is expected this week, but the change won't be significant. Economic news and the outcome of the tariff squabble may have more impact than the Bank of Canada on fixed rates going forward. 

In their accompanying statement the Bank of Canada stated that "CPI inflation remains close to 2%, with some volatility due to the temporary suspension of the GST/HST on some consumer products. Shelter price inflation is still elevated but it is easing gradually, as expected. A broad range of indicators, including surveys of inflation expectations and the distribution of price changes among components of the CPI, suggests that underlying inflation is close to 2%. The Bank forecasts CPI inflation will be around the 2% target over the next two years."

They also stated - "Setting aside threatened US tariffs, the upside and downside risks around the outlook are reasonably balanced. However, as discussed in the MPR, a protracted trade conflict would most likely lead to weaker GDP and higher prices in Canada." Such a scenario may present challenges for how they manage rates in 2025.

The market entered 2025 in a better position than at the start of 2024. Inflation is lower, rates are lower, housing supply has increased and home buyers are in a better position overall. Affordability remains challenging for many but every rate cut helps. If you want to explore what the current buyer's market in housing and improving mortgage affordability might mean for you, now is the time to reach out to us at Frank Mortgage to see what is possible. Please click below to search for rates or to arrange to speak with us.

The prime rate at the banks will now decline from the current 5.45% to 5.20%.

You can read the Bank of Canada's full press release here - 

https://www.bankofcanada.ca/2025/01/fad-press-release-2025-01-29/

The next Bank of Canada rate announcement is scheduled for March 12.

Final Word

The Canadian bank prime rate plays an important role in the country's financial system, serving as a benchmark rate for a variety of financial products. While the Bank of Canada does not directly set the prime rate, it does have an indirect influence on it through its monetary policy. Banks use the prime rate as a basis for setting interest rates on loans and lines of credit, and borrowers with these variable-rate products, such as variable-rate mortgages, are exposed to interest rate risk. While predicting the future direction of the prime rate is difficult, understanding how it is determined and how it is used by banks and borrowers can help individuals make informed financial decisions.

If you have a variable rate mortgage you need to be aware that rates may unexpectedly increase. We hear some advocates suggesting that rates will definitely come down even more in the latter half of 2024 and into 2025. This is a popular view and we also believe it is likely to happen. But nobody really knows this. Manage your own affairs without trying to guess where rates are going. Variable-rate mortgages contain risk and are not for everyone.

If you are in the market currently for a mortgage, a fixed rate might be the best solution. With no exposure to interest rate risk during the term of the mortgage, a fixed-rate mortgage is the conservative choice for the majority of us that have a low risk tolerance.