Prime Interest Rate in Canada
January 25th, 2023 – The prime interest rate in Canada is currently sitting at
- A variable-rate loan, lines of credit and variable-rate mortgage fluctuate with the lender’s prime rate.
- A breakdown of five key home buying steps.
- Several first-time home buyer incentives are available to help you save money on your first home purchase.
What is the prime interest rate?
The prime rate is what Canada’s major banks and lenders use for benchmarks on their variable-rate loans, lines of credit and variable-rate mortgages. A variable rate floats with the prime rate, unlike a fixed rate that remains the same throughout a loan’s term. As the prime rate fluctuates, the interest rate charged on variable interest products changes in tandem with the lender’s prime.
Important: Although the prime rate and Bank of Canada (BoC) policy interest rates are not the same, every lender’s prime rate is heavily influenced by the BoC policy rate.
How is a prime rate determined?
The prime rate is mainly influenced by the Bank of Canada (BoC) policy interest rate – also referred to as the target to the overnight rate. These rates are not the same, but when the BoC adjusts its overnight rate target, lenders will often follow suit by changing their prime rate within a few days.
The Homebuying Process
Buying a home is an exciting time for many Canadians – especially when it’s your first home. Sometimes you feel like you’re receiving information overload, so it’s useful to have each step laid out.
See: Guide to Buying a Home in 2021
Following is a breakdown of five important steps in the homebuying process:
- Finding a home. Once you’ve determined what amount of mortgage you can afford each month and then secured a preapproval, it’s time to start searching for a home. Be sure to enlist the services of a trusted local real estate broker who’s experienced in buying and selling homes in your area(s) of choice. As a homebuyer, the services of a real estate agent are free. The seller pays the commission to both the buyer’s and seller’s agent. Finding a realtor who doesn’t represent the seller’s interests is important.
- Securing financing. Once you decide on a property, it’s time to get your mortgage financing lined up. Visit nesto to secure the best rate from the start.
- Making an offer. There’s no magic number of properties you should consider before making an offer on the house. The key is to view the right number of homes that enable you to be confident in making an offer on one particular property. Your real estate agent will suggest a reasonable offer based on the asking price and other variables, including how much similar properties have been going for and how long it takes to sell in the area. In many cases, the seller will counteroffer. But, in cases with multiple offers, you want to ensure your offer is high enough to entice the seller to work with you on an agreement. It’s important to make your offer conditional on such important aspects as securing financing and having a home inspection. These two main conditions can save you a headache in the long run if you can’t secure financing in time or an inspection uncovers something material defect with the home. (See: How to Make an Offer on a House)
- Home inspection process. A home inspection is an added level of protection in the homebuying process that ensures you’re not getting stuck with a property that will turn into a money pit or not be suitable collateral for the lender. The sole purpose of a home inspection is to reveal whether the building’s structure, materials and systems are of good quality before you commit to buying a particular home. A professional inspector looks over the home’s major components and prepares a detailed report. If there are outstanding issues, the inspector will provide you with a schedule outlining the estimated costs and a timeline detailing when these repairs should be completed. (See: Home Inspection Fees and Services in Canada)
- Closing on a home. Before you receive the keys to your new home, there are several closing documents you’ll have to sign with your real estate lawyer. All closing fees are also due at this time. Closing costs range from legal fees, land transfer taxes, appraisal fees, and title insurance fees to covering prorated utilities and property taxes on the new property. They can add up quickly, so it’s best to set aside 5% of your purchase price to cover closing costs. They typically amount to anywhere from 3-5% of the home’s price, but it’s always in your best interest to save more money than you need. See: Closing Costs: What Are They and How Much Will You Pay?
Tip: Aim to set aside 5% of the home’s purchase price for closing costs. If you save too much, you can easily put the extra funds towards furnishing and decorating your new home.
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First-time home buyer considerations
As a first-time home buyer, you must be aware of the various programs available to offset homebuying costs and help fund your down payment, which is often one of the toughest hurdles to home buying.
Tip: Be sure to pay attention to when each first-time home buyer incentive must be claimed so that you don’t miss out on important savings.
Following are details about four key first-time home buyer programs that could save you money:
- First-Time Home Buyers’ Tax Credit (HBTC) – is a credit on your income taxes to help offset closing costs associated with buying your first home. The HBTC allows you to claim $5,000 on your tax return, resulting in a maximum $750 rebate. You must apply to receive the credit on the tax return in the same year you purchase your first home. See: Who Can Benefit From the Home Buyers’ Tax Credit (HBTC)?
- First-Time Home Buyers’ Land Transfer Tax (LTT) Refund may be a partial or full exemption or refund of the land transfer taxes paid to the province, territory or municipality. Tax. See: Everything You Need to Know About the Land Transfer Tax
- Home Buyer’s Plan (HBP) is a tax and interest-free loan against your RRSP that lets you withdraw up to $35,000 ($70,000 for a couple) to buy or build a qualifying home for yourself or a related person with a disability. You don’t have to be considered a first-time home buyer to take advantage of the HBP if you have a disability or you’re helping a related person with a disability buy or build a home. You’re considered a first-time home buyer if you didn’t occupy a home that you or your current spouse or common-law partner owned in the past four years. See: What is the RRSP Home Buyers’ Plan (HBP)?
- GST/HST New Housing Rebate (NHR) is a rebate on building or purchasing a newly built home. The rebate of the GST or the federal portion (5%) of the HST that you paid on the home. Details of the rebate vary by province. For instance, Ontario’s new home rebate application must be filed within two years of the newly built home closing date, and it is limited to a maximum of $24,000 if you paid the HST on the purchase of the land and $16,080 if you didn’t.
Other articles in this guide: “How to Choose a Mortgage Rate“
- Mortgage Terms in Canada
- Should I get a Fixed or Variable Mortgage Rate?
- Mortgage Prepayment
- Porting and Assuming Home Loans in Canada
- Skipping a Mortgage Payment
- What is a Cash Back Mortgage?
- What is a Collateral Charge Mortgage
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