Prime Rate in Canada | Ratehub.ca (2024)

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What is the prime rate?

When you apply for a loan with a variable interest rate, your lender will give you an annual interest rate that’s tied to the bank’s prime rate. All kinds of loans are based on this rate, including certain mortgages, car loans, personal lines of credit, and even some credit cards. Think of the prime rate as the anchor these other interest rates are based on. As the prime rate in Canada moves up or down, so too does the rate of interest you pay on your loan.

May 2024: Mortgage market update

The first several months of 2024 have been volatile for the housing market in Canada, but signs are emerging that housing market activity could pick up steam as expectations grow for rate cuts from the Bank of Canada as early as the summer. Bond yields remain unpredictable, rising and falling at a dizzying pace as jumpy investors react to various economic reports out of Canada, the United States and around the world. Following a brief period of decline in December and January, they are currently in the upper 3% range, in part due to investors’ fears about the US Federal Reserve’s “higher for longer” rate stance. Both fixed and variable mortgage rates are historically elevated at this time. If you’re shopping around for a mortgage rate in Canada, here’s some information you should know.

• Real estate update: On May 15, 2024, the Canadian Real Estate Association (CREA) came out with the most recent statistics for the Canadian housing market for the month of April 2024. The latest data shows that the usually busy spring housing market has been relatively quiet. Some 37,745 homes changed hands across Canada in April, marking a -1.7% monthly decrease (although up by 10% year over year). While sales remain slow, new listings have been coming to market at a much faster pace – some 70,346 homes were listed in April, nearly twice the number of sales. As a result, April’s sales-to-new-listings ratio (SNLR) fell to 53.45% from the previous month’s 57.4%, though still remaining balanced. A ratio between 45 - 65% indicates a balanced market, with above and below that threshold reflecting sellers’ and buyers’ markets, respectively. The flood of new listings also helped dampen price growth, but were unable to prevent it completely. The national average home price in Canada stood at $703,446 in April, up from March’s $698,520, but down by -1.8% on an annual basis.

  Read

  more: National home sales fall in April as buyers stick to the sidelines
• CPI update: The latest Consumer Price Index (CPI) reading for the month of April from Statistics Canada indicates that headline inflation came in at 2.7%, down by -0.2% from the previous month. This decrease can be attributed in large part to declining food prices, which were 1.4% in April compared to 1.9% in March. Gas prices, on the other hand, rose by 6.1% year over year during the same month. However, the single largest contributor to inflation continues to be shelter costs, which include both mortgage interest costs (up by 24.5% annually) and rents (up by 8.2% annually). Still, the Bank of Canada should be pleased by April’s report. Two of the metrics connected to inflation that the Bank watches most closely – CPI Median and CPI Trim – fell to 2.6% and 3.2% in April, respectively. With this latest CPI reading, markets are now pricing in a 50% chance that the Bank of Canada will cut its target for the overnight rate at its next announcement on June 5.

Read more: Canadian CPI comes in at 2.7% in April

2024 Housing market forecast

Given the growing expectations of rate cuts and pent-up buyer demand, CREA has updated its forecast for 2024 and 2025.

It expects that some 492,083 homes will change hands in 2024, an increase of 10.5% from 2023. Sales growth is forecast to be most noticeable in markets where housing demand has remained consistently robust, like Alberta. However, even markets that suffered from historically low demand, such as Ontario, British Columbia and Nova Scotia are expected to enjoy growth as well. The average home price in Canada is predicted to climb by 4.9% to $710,468 in 2024.

The housing market is projected to continue its recovery in 2025, with sales expected to hit 530,494 residential properties (an annual increase of 7.8%, while the average home price in Canada is expected to climb by 7% to $760,120.

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How is the prime rate set in Canada?

Each bank sets its own prime rate, but the Big Five Banks usually all have the same prime rate. The prime rate is primarily influenced by the policy interest rate set by the Bank of Canada (BoC), also known as the BoC's target for the overnight rate. When the BoC raises the overnight rate, it becomes more expensive for banks to borrow money, and they raise their respective prime rates to cover the added costs. Conversely when the BoC lowers the overnight rate, banks usually lower their prime rates by the same amount.

Is the prime rate going up in Canada?

As a result of a series of increases in the Bank of Canada's policy interest rate to control historically high inflation rates, the prime rate had also been steadily going up since the beginning of 2022 and into early 2023.

After a conditional pause in rate hikes for most of the first half of 2023, obstinately high inflation and strong Q1 GDP growth incited the Bank to once again resume rate hikes. In its June and July announcements, the Bank raised its key overnight lending rate by 0.25% twice in a row for a total of 10 rate hikes since March 2022, bringing it to 5%. As a result, the Prime rate rose to 7.2%.

Most recently, on the Bank’s fourth announcement of the year on June 5, it finally carried out the first rate cut in over four long years, citing steadily declining inflation and slackening GDP as the drivers of its decision. With the overnight lending rate having fallen from 5.00% to 4.75%, the prime rate will fall to 6.95%.

How does the prime rate affect mortgage rates in Canada?

There are two main types of mortgage rates in Canada – fixed and variable. When you get a fixed mortgage rate, you agree to pay the same rate over the entire course of your mortgage term regardless of what happens in the outside market. Fixed mortgages are a good option if you’re worried mortgage rates will go up, or if you want to enjoy the stability of paying the same mortgage rate until it’s time to renew.

When you get a variable mortgage rate, the rate will be expressed as the prime rate plus or minus a certain percentage. When the prime rate in Canada goes up or down, your mortgage rate will go up or down by the same amount. Variable mortgages usually come with a lower rate vs. fixed-rate mortgages when you sign up, but there’s the risk that the rate could go up (or down) during your mortgage term. Many lenders will allow you to convert a variable-rate mortgage to a fixed-rate mortgage at any time, but you will have to pay the fixed rate as of the time you decide to switch.

Let’s look at an example. If the prime rate is 3.0%, and you get a variable-rate mortgage at prime minus 0.8%, your effective interest rate will be 2.2%.

Example 1: Your original mortgage rate

prime rate - discount to prime rate = your mortgage rate

3.00% - 0.80% = 2.20%

The prime rate can rise and fall over time, and variable-rate loans will rise and fall with it. To continue this example, if the prime rate were to increase by 0.25% to 3.25%, the interest rate on your mortgage would rise by the same amount, to 2.45%.

Example 2: Your new rate after prime rate increases during your mortgage term

new prime rate - discount to prime rate = your new mortgage rate

3.25% - 0.80% = 2.45% (new mortgage rate)

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Bank prime rates

• Tangerine Prime Rate
• TD Bank Prime Rate
• Scotiabank Prime Rate
• HSBC Prime Rate
• Bank of Montreal Prime Rate
• CIBC Prime Rate
• RBC Royal Bank Prime Rate

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