Today’s Prime Rate in Canada
The prime rate as of today’s date in Canada is 7.20%. The prime rate is a floating rate calculated using the Bank of Canada’s overnight target rate, also known as the policy rate. This rate applies to variable mortgage and revolving credit products. However, this rate also affects business and commercial lending since it is used as the benchmark for commercial banks in the country.
Mortgage Industry Insights: April 2024
Bank of Canada Rate Announcement
The latest Bank of Canada (BoC) announcement on April 10th left the policy interest rate unchanged at
The Governing Council cited that they need to see evidence of sustained downward momentum in inflation. However, a rate cut is within the realm of possibility at the next announcement as long as sustained easing of inflation continues.
The next announcement will be held on June 5th and bond markets are pricing in a high probability of a 25 basis point rate cut. However, without sustained or further reductions to core inflation, the Bank may decide to leave the key rate unchanged once again.
Real Estate Market Update
The Canadian Real Estate Association (CREA) released its home sales data for March on April 12th. The data showed a slight increase in home sales, up 0.5% compared to February.
March’s home sales activity has brought current activity down to around 10% below the 10-year average. Weekly tracking in March showed an increase in new supply mid-month, leading to an increase in sales by the end of the month. The first week of April has already shown an increase in listings. Housing demand in 2024 is forecasted to recover, which could mean we see the spring lending season heat up with renewed competition as buyers who were waiting on the sidelines for rate cuts start to enter the market.
New listings declined 1.6% month-over-month, adding to an already tight market. Home prices continued to rise, with the average year-over-year sale price increasing by 2%. With rising home prices comes a rise in the income needed to qualify for a home. Nationally, the average income needed to purchase a home in Canada is currently up 5.01% year-over-year.
CPI Inflation Update
The latest inflation data by Statistics Canada on April 16th showed the Consumer Price Index (CPI) rose 2.9% year-over-year in March, up from 2.8% in February. Gasoline prices were the highest contributor to the year-over-year increase, as fuel prices rose faster in March. Gasoline prices increased 4.5% after a 0.8% increase in February. This sharp increase in prices is attributed to higher prices at the pumps due to supply concerns, geopolitical conflict, and continued voluntary production cuts.
Shelter prices continue to be a large driver of inflation in March, with mortgage interest costs and rent contributing the most to the 6.5% increase of this component. Mortgage interest costs rose 25.4% year-over-year in March after increasing 26.3% in February. Rent prices increased 8.5% year-over-year following an 8.2% gain in February. Rental increases can be attributed partially to the higher interest rate environment creating barriers to homeownership.
Inflation is expected to remain around 3% throughout the first half of 2024, with the Bank of Canada predicting it will return to the 2% target in 2025.
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.
*Most Recent Prime Rate Shown
Source: BankofCanada.ca
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.
How Does the Prime Rate Impact Variable Mortgage Rates?
The BoC overnight target (policy) rate influences prime rates. When the policy rate changes, prime rates will fluctuate accordingly. Most lenders determine their prime rates based on the policy rate + 2.2%. Lenders will use the prime rate to set their posted rates which are the rates that lenders advertise. These posted rates combine the prime rate plus or minus any additional percentage points. For example, a lender may advertise a rate as prime + 0.5% or -0.5% meaning you will be charged the prime rate plus or minus 0.5%.
Variable-rate mortgages can either have fixed payments or payments that fluctuate with changes to the prime rate. Variable-rate mortgages with fluctuating payments, also known as adjustable-rate mortgages (ARM), are not impacted by negative amortization, as payments will adjust to compensate for changes to your mortgage rate.
If you have a mortgage with fixed payments, your mortgage rate will increase if the prime rate changes. Although your regular payment will stay the same, more will go toward the interest portion, and less will go toward the principal. This could mean that you end up with more of your mortgage remaining at the end of the term, known as negative amortization.
If the prime rate decreases, your mortgage rate will decrease as well. Less of your payment will go toward the interest portion, while more will go to the principal. This could mean that you pay off your mortgage sooner and have less of your mortgage remaining at the end of your term.
Prime Rate Relationship to the Bank of Canada Overnight Rate
All lenders set their own prime rate, influenced by the BoC overnight rate. Not all lenders will change rates simultaneously when the rate changes, so there can be a lag of a few days to a few weeks, depending on the lender. It’s also important to note that lenders are not required to change their prime rate to match changes to the BoC overnight rate though competition usually forces them to increase or decrease rates to match those of their competitors. Each lender sets their prime rate higher (usually 2.2%, but not always) than the policy rate, pricing in the added costs and risks associated with mortgages.
History of Prime Rates in Canada
Source: bankofcanada.ca
Bank of Canada Formed in 1935
The Bank of Canada was founded in Ottawa in 1935 with a mandate “to regulate credit and currency in the best interests of the economic life of the nation.” The BoC determines the target for the overnight rate, and it has the ability to make changes at any time. Since its inception, it has helped the country rise from the Great Depression that crippled the world.
1935 – 1955: The Great Depression, World War II & Post War
The Great Depression and World War II significantly impacted the economy, causing strong criticism of Canada’s financial system. The target overnight rate in Canada started at 2.5% in 1935 and fell to 2.0% by the end of 1955. Although the rate fell to 1.5% in 1945, Canada’s role in supplying natural and manufactured resources during WWII helped uplift the economy.
1977 – 1991: Global Oil Crisis
The Canadian economy continued a slow rise after World War II until it hit a high of 10.28% in October 1978. The oil boom and record-high prices caused by the OPEC oil embargo saw the target overnight rate increase to 20.03% in 1981 before falling steadily to 7.14% in March 1987.
1991 – 2008: Economic Recovery
The target overnight rate remained relatively stable during the economic recovery following the 1980s recession, generally decreasing with a few exceptions. The BoC introduced the inflation target rate in 1991 to achieve price stability through low, stable and predictable inflation.
2009 – 2017: The Great Financial Crisis
The financial crisis of 2009 saw the BoC overnight rate fall below 1%, reaching a record low of 0.5%. A fall in oil prices in 2014 also contributed to the recession in Canada, which affected rates which were recovering at 1.25%. They then fell back to 0.75% in 2015.
2018-2022: COVID
After the financial crisis, Canada’s economy grew significantly. Although inflation in 2019 prevented the BoC rate from increasing beyond 1.75%, the COVID pandemic caused a reversal that saw rates plunge to 0.25% by the first quarter of 2020. The rate remained near 0.25% throughout most of 2020 and 2021 as the impacts of reduced consumer spending continued with the uncertainty of the pandemic.
2022-Present: Fight to Control Inflation
As inflation increased in early 2022, the BoC started to raise the overnight rate to fight inflation. From the beginning of 2022 until the end of 2022, the BoC raised the target overnight rates from 0.25% to 4.25% in an effort to bring inflation back under control. As inflation remains above the BoC 2% target, the Bank has raised the overnight rates again to 5.00%.
Canada Prime Rate Forecast
Inflation is up 3.8% year-over-year, meaning we are still further from the BoC target of 2%. Additionally, since the US Federal Reserve (the Fed) recently raised rates another 0.25%, the BoC likely will follow suit during their fall announcement. This past month, Fitch also cut the United States’ credit rating due to a 33% overall increase YoY in money supply which drove up bond yields. American bond yields took Canadian bond yields and fixed mortgage rates along with them. It is now anticipated that inflation may remain stubbornly high and not reach the 2% target until sometime in 2025. This means we may not likely see any rate cuts until mid-2024, and even then, they may be gradual at 25 basis points per quarter.
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