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Banks use the prime rate to set interest for different types of loans.
Rudro Chakrabarti Managing Editor

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Canada’s prime rate, the interest rate that major banks charge their best customers, is now 2.45% — a low not seen since the 2008 financial crisis.

The rate last fell March 30; before that, the top banks made back-to-back cuts on March 6 and March 16. In total, the prime rate fell all the way from 3.95% to its current level in less than a month.

The Bank of Canada (BoC) pushed hard for those rate cuts as the coronavirus pandemic took hold, ensuring people have access to enough cheap credit to weather the financial fallout.

Here’s how the prime works and how today’s rock-bottom rates affect you.

What is the prime rate?

A conceptual look at variable interest rates. Where next?
travellight / Shutterstock

Formally called the prime lending rate, this fluctuating number is used to set interest rates on several different types of loans.

Loans tied to the prime rate include:

  • Variable-rate mortgages.

  • Variable-rate car loans.

  • Home equity lines of credit (HELOCs).

  • Certain types of credit cards (typically balance transfer cards with variable APRs).

As the prime rate shifts up or down, so will the interest you pay if you currently have one of those loans. In addition, banks will offer better or worse deals on new fixed-rate loans, depending on the prime.

Who sets the prime rate?

While each bank sets its own prime rate, the big five — Bank of Montreal (BMO), Bank of Nova Scotia (Scotiabank), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD) — usually have the same number.

That’s because the prime rate is heavily influenced by the BoC’s “policy interest rate.” It’s also known as the “target for the overnight rate,” because that’s what major banks charge for one-day loans between themselves.

When the BoC raises the overnight rate, it becomes more expensive for banks to borrow money. So they raise their respective prime rates to cover the added costs by pulling in higher interest from you.

When the BoC drops the overnight rate, banks usually lower their prime rates by the same amount — but there are some notable exceptions, like in 2015.

Changes in Canada's prime rate and overnight rate
Date Prime Rate Target for the Overnight Rate
March 2020 2.45% 0.25%
March 2020 2.95% 0.75%
March 2020 3.45% 1.25%
October 2018 3.95% 1.50%
July 2018 3.70% 1.50%
January 2018 3.45% 1.25%
September 2017 3.20% 1.00%
July 2017 2.95% 0.75%
July 2015 2.70% 0.50%
January 2015 2.85% 0.75%
September 2010 3.00% 1.00%
July 2010 2.75% 0.75%
June 2010 2.50% 0.50%
April 2009 2.25% 0.25%
March 2009 2.50% 0.50%
January 2009 3.00% 1.00%
December 2008 3.50% 1.50%
October 2008 4.00% 2.25%
October 2008 4.50% 2.50%
April 2008 4.75% 3.00%
March 2008 5.25% 3.50%
January 2008 5.75% 4.00%
December 2007 6.00% 4.25%

Why does the prime rate go up and down?

Three Canadian flags in front of a business building in Ottawa
BalkansCat / Shutterstock

The BoC is the nation’s central bank, and its mandate is to “promote the economic and financial welfare of Canada.” To do so, it modifies its targets for the overnight rate in line with the economy's performance and inflation forecasts.

If the economy is ballooning, the BoC might raise its target for the overnight rate to pull back on people’s spending and keep prices from inflating to astronomical heights. The top banks will likely raise their prime lending rate in the weeks that follow.

When the economy is weakening or inflation dribbles to undesirable lows, the BoC will lower its overnight rate. Exceptional circumstances like the coronavirus pandemic can lead to emergency rate cuts, too.

"The spread of COVID-19 is having serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices. The pandemic-driven contraction has prompted decisive [action] to minimize any permanent damage to the structure of the economy," the Bank of Canada said in a March press release, explaining the most recent cut to the overnight rate.

It shifted to an all-time low of 0.25%, a rate last invoked during the 2008 financial crisis.

How the prime rate impacts you

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Dean Drobot / Shutterstock

Home equity lines of credit

If you have access to a HELOC, you'll feel the movements in the prime rate most closely.

Rates on those products change in sync with the prime. The adjustable rate on a HELOC might be advertised as "prime plus 1%" or "prime plus one," for example.

The rate on this hypothetical HELOC would have dropped from 3.95% to 3.45% a few weeks later after the prime slid from 2.95% to 2.45%.

Credit cards

Similar to HELOCs, some lower-interest or variable APR credit cards might have an interest rate described as “prime plus 4.50% to 12.75%” or “prime plus 9.99%.”

Auto loans

Variable-rate auto loans shift in line with the prime, and the rate you’ll get on a new fixed-rate loan will change, too.

How much depends on the institution, so it's important to check with your lender when you hear about a prime rate hike or cut.

Mortgages

The two most common types of mortgages in Canada, fixed-rate mortgages and variable-rate mortgages, interact with the prime in different ways.

An active fixed-rate mortgage won’t be affected — that’s what makes them fixed — but the rates for new borrowers usually go higher or lower in step with the prime.

By contrast, the interest rate you pay with variable-rate mortgages tangos directly with the prime rate over the course of the loan. With a 5-year variable mortgage, you could be quoted for a rate that looks like "prime -0.45%" — currently equalling 2.00%.

With interest rates this low, there’s never been a better time to snag a mortgage, variable or fixed. Make sure you're shopping around before settling down on a rate. Online brokerages simplify the process by allowing you to compare rates from over than 30 federally insured lenders.

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