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.

June 2024: Mortgage market update

The Canadian housing market has been having a rather sleepy spring season thus far, with buyers biding their time on the sidelines and awaiting lower rates. With the Bank of Canada having implemented its first policy rate cut since March 2020 on June 5 and taking the policy rate from 5.00% to 4.75%, there is optimism that activity could now pick up.

Variable mortgage rates fell in tandem with the policy rate, and, with anticipation of another rate cut in July running high, further downward movement in mortgage rates is expected.

Fixed mortgage rates are tied to the bond market rather than directly to the Bank of Canada’s rate, and bond yields have fallen to the 3.3% range in the wake of the Bank of Canada’s June rate cut and in response to a number of economic reports from Canada and elsewhere.

That said, when looked at from a historical perspective, both fixed and variable mortgage rates remain elevated. If you’re looking for a mortgage rate in Canada right now, these are some economic factors you ought to be aware of.

• Real estate update: On June 17, 2024, the Canadian Real Estate Association (CREA) came out with the most recent statistics for the Canadian housing market for the month of May 2024. The latest data shows that the usually busy spring housing market has been relatively quiet, as buyers sit tight in anticipation of lower rates on the horizon. The 51,219 homes sold across Canada over the course of May represent a -5.9% decline from the same time last year. Sellers, however, are flooding into the market, with some 99,614 residential properties newly listed in May, up by 13.5% year over year. As a result, May’s sales-to-new-listings ratio (SNLR) fell to 52.8%, meaning that buyers can enjoy shopping in a balanced market. CREA considers a ratio between 45 - 65% to indicate a balanced market, with above and below that threshold reflecting sellers’ and buyers’ markets, respectively. The flood of new listings, coupled with sluggish demand, led to price decline, with May’s national average home price of $699,117 down by -4% from this period last year.

  Read

  more: National real estate market stagnates in May ahead of rate cut effect
• 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

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