Mortgage Basics

Canada Prime Mortgage Rate History

Canada Prime Mortgage Rate History

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    The prime rate in Canada is a floating rate calculated using the Bank of Canada’s overnight target rate, also known as the policy rate, that applies to variable mortgage products. Additionally, as the BOC’s overnight target rate continues to change, it also affects the prime interest rate, which is used as a benchmark for various mortgage transactions in Canada. Because prime rates change along with the overnight target rate, some refer to it as the Bank of Canada prime rate. But in reality, the lender sets the prime, not the Bank of Canada.

    Today’s Canadian prime rate is set at , higher than at the start of 2020 after rising from its previous level of 3.70% before the pandemic. It comes after the accelerated cuts to the overnight rate to help boost the economy hit by the COVID-19 pandemic to minimize the impact on Canada’s finances.

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    Key Takeaways:

    • The prime rate is the benchmark rate banks use as a starting point for their variable rates products such as variable mortgages, variable car loans, lines of credit, HELOCs and credit cards.
    • The Bank of Canada sets its policy rate, and then by adding a spread, the various banks determine their prime rates.
    • The prime rate in Canada has recorded significant changes over the last 87 years from its introduction in 1935. It recorded its all-time high rate of 20.03% in August 1981.

    Prime Rate vs Bank of Canada Overnight Rate (1935 – 2024)

    The prime rate in Canada refers to the benchmark rate set by the banks using the BoC rates as their starting point for varying mortgage interest rates. The overnight target to the policy rate is determined by the Bank of Canada (BoC), which, with an additional spread, comes up with the bank’s prime rate.

    History has recorded significant changes to the prime rate in Canada over the last 87 years. With an all-time high of 20.03% in August 1981, when the Bank of Canada hiked rates to control inflation to the lowest rate of 2.25% in April 2009 during the financial crisis, Canadian borrowers have seen several changes in their mortgage journey. Between September 2010 and January 2015 was the longest period in which prime mortgage rates remained unchanged at 3%.

    Since the introduction of inflation targeting in 1991, the most significant increase in the prime interest rate in Canada was 4.25%.

    The current prime rate as of May 20, 2024 stands at .

    The current overnight rate as of May 20, 2024 stands at .

    Source: bankofcanada.ca

    Where Rates Stand In March 2024

    In March, the Bank of Canada maintained rates once again. This was expected, as inflation still remains above target. We are reminded that it takes about 8 quarters (24 months) for a rate hike to have its intended impact on the economy.

    In March 2024, we are seeing a “wait and see” approach, with rates held once again to give previous rate hikes enough time to impact inflation.

    Types of Loans Impacted by the Prime Rate

    Variable-Rate Mortgage

    A variable-rate mortgage fluctuates with the prime CA rates throughout the mortgage term. Based on the current market conditions, your variable-rate mortgage interest will increase or decrease depending on the bank’s prime rate, which also impacts your monthly principal payments. If you choose a variable mortgage rate home loan, you may be able to take advantage of a decrease in CIBC prime rate if it does happen within your loan period. This means you’ll pay less interest on the home loan than it would if it were a fixed-rate mortgage loan.

    Variable-rate Car Loans

    Variable-rate car loans have interest rates that rise and fall with the Royal Bank prime rate. Your lender will add a little extra percentage, known as the spread, to the base Bank of Canada’s policy rate to make a profit as you make your monthly payment. Therefore, a variable-rate car loan means having a variable interest rate where your repayments fluctuate with the market prime.

    While variable-rate car loans could lead to lower interest rates due to the eventual fall of the prime rate in Canada, it could also pose a potential risk of additional interest-carrying costs if the prime lending rate in Canada rises in periods of financial prosperity.

    Home Equity Lines of Credit (HELOCs)

    A home equity line of credit, also known as a HELOC, is a line of credit secured by your home’s equity. It is a way homeowners can access funds for renovations, large expenses, or alternative debt repayment because it comes as a lump sum cash. Usually, lenders offering HELOCs are willing to provide lesser interest rates than what is obtainable in personal loans.

    Revolving Credit: Credit Cards and Line of Credit

    Variable-rate credit cards charge interest based on the lender’s prime rate. Though not as popular as before, variable-rate credit cards are now more widely known as lines of credit cards. All revolving credit products have either a fixed rate from the credit card issuer or come as a line of credit with a variable interest rate. Fluctuations in the lender’s prime rate will align with changes in the Bank of Canada’s policy rate – affecting the interest you are charged on your revolving credit products. Revolving credit is an umbrella term used for all re-advanceable credit products – you can pay and reuse the limit immediately.

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    Frequently Asked Questions: Prime Rate

    What does Prime Rate mean?

    The prime rate is the benchmark financial institutions use to price variable-rate mortgages and other financial products in Canada. Financial products that rely on the prime interest rate in Canada include variable mortgage rates, variable-rate loans, variable-rate credit cards, lines of credit, and HELOC.

    Who Sets the Prime Rate?

    Each bank or lender in Canada can set its prime rate based on the spread added to the Bank of Canada’s (BOC) overnight rate. The spread is the extra fee in the form of an interest rate charged to earn profit for lending money to borrowers and mortgagors. Usually, changes to the target overnight rate affect the prime set by each lender. That means the RBC prime or Scotia prime rate may differ from HSBC prime, CIBC prime, BMO prime, or TD Bank prime rate. However, in practice, once the majority of the chartered banks in Canada update their prime rate – all other lenders in the country will follow suit.

    How does the Prime Rate impact my existing mortgage?

    The lender’s prime rate is the benchmark rate for all variable-rate products that the lender offers. If you have a variable-rate mortgage, your payment is calculated using the discounted rate from the lender’s prime rate. As the lender’s prime rate fluctuates with the Bank of Canada’s overnight rate, your payment will also change to compensate for the fluctuation.

    How does the Prime Rate impact my future mortgage?

    When you arrange your variable-rate mortgage, the prime rate at that time will be used to provide a discounted rate for your mortgage payment. Fixed rates in Canada fluctuate in anticipation of the trajectory of the prime rate. If the prime rate is expected to increase, then the fixed rates will increase in tandem as money is getting more expensive to borrow overall. The economy influences the prime rate in Canada, and your future mortgage rate will be affected by the economy and prime rate at that time. So, when you borrow a home loan, consider the risks and rewards of Canada’s variable prime interest rate.

    Frequently Asked Questions: Bank of Canada Target Overnight Rate

    What is the Bank of Canada’s Target Overnight Rate?

    The target for the overnight rate is the interest commercial banks pay or receive from the Bank of Canada on their net deposits or credit overnight – at the end of each day. The target for the overnight rate is also known as the Bank of Canada Policy Rate.

    Why Does the Prime Rate Follow the Bank of Canada Target Overnight Rate?

    The prime rate equals the target overnight rate with an added spread. The spread is the difference between the interest lenders charge their clients compared to what the Bank of Canada charges to lend them overnight or pay on any overnight deposits for settlements.

    What is the relationship between the bank rate and the overnight rate?

    The Bank Rate is another name for the prime rate, which is calculated with the additional spread to the overnight rate. The target for the overnight rate is also known as the policy rate.

    Source: bankofcanada.ca

    Brief History of Prime Rates in Canada

    Bank of Canada was Formed in 1935

    The Bank of Canada was founded in 1935 in Ottawa to make decisions on the financial aspect of the Canadian economy. The BoC decides the overnight target rate and can make changes at any time. Since its inception in 1935, it helped lead the rise from the great depression that crippled the world economy. 

    1935 – 1955: The Great Depression, World War II & Post War

    From the 1930s, the great depression and World War II significantly impacted Canada’s economy, causing strong criticism of the country’s financial system. At the time, the prime rate in Canada, which started at 2.5% in 1935, had by the end of 1955 fell to 2.0%. Although there was a sharp fall to 1.5% in 1945, Canada’s role in supplying natural and manufactured resources during the Second World War helped beef up its economy.

    1977 – 1991: Global Oil Crisis

    After World War II, the Canadian economy continued to rise slowly along with the prime rate until it hit a high point of 10.28% in October 1978. The oil boom due to record high prices caused by the OPEC oil embargo saw the prime rise even further, up to 20.03% in 1981, before falling steadily to 7.14% in March 1987.

    1991 – 2008: Economic Recovery

    During the Canadian economic recovery, the Bank of Canada introduced the inflation rate targeting to prevent the prime rate from falling below expectations.

    2009 – 2017: The Great Financial Crisis

    The great financial crisis of 2009 saw the BOC prime rate slump below 1%, reaching a record low of 0.5%. Furthermore, the fall in oil prices in 2014 also contributed to Canada’s recession, which affected the rates, causing them to fall from their recovery rate of 1.25% back to 0.75% in 2015.

    2018-2024: COVID and Inflation

    The Canadian economy grew significantly after the great financial crisis, and a slow rate rise was witnessed. Although the 2019 inflation prevented the BOC prime rate from increasing beyond 1.75% as of 2019, the COVID pandemic also caused a reversal that saw the BOC overnight rate plunge to 0.25% by the first quarter of 2020. Today, the BOC rate stands at , while the Canadian bank prime rate is .

    Final Thoughts

    From the start of prime rates in 1935 to the introduction of inflation targeting in 1991, the Canadian economy has seen many ups and downs that significantly affected the financial lending market. The 1981 all-time surging rates should be warnings of possible variable mortgage risks. In retrospect to the 1980s, our technology today provides many systems to survey and control the financial markets in protecting Canadians against surges to the prime rate.

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    At nesto, all of our commission-free mortgage experts hold concurrent professional designations from one or more provinces. Our clients will receive the best advice and care when they speak with specialists that exceed the industry status quo. 

    Unlike the industry norm, our agents are not commissioned but salaried employees. This means you’ll get free, unbiased advice on the most suitable mortgage solution for your unique needs. Our advisors are measured on the satisfaction and quality of advice they provide to their clients. 

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