Canada prime rate changes have a significant impact on the day-to-day lives of Canadians – from changing mortgage lending rates to increasing savings account interest rates.
Prime interest rate is the baseline that banks and credit unions use to determine how much they will charge on mortgages, lines of credit, and for loans extended to customers with excellent credit.
While every bank and financial institution has the power to set its own prime interest rate, this interest rate is closely tied to the policy interest rate set by the Bank of Canada.
The policy interest rate, or overnight target rate, is the interest rate that financial institutions pay when lending money to one another.
Let’s see how you could be impacted by Canada prime rate changes.
How often are there Canada prime rate changes?
Each year, the Bank of Canada sets 8 dates when a press release will be published to announce any changes to the policy interest rate. These adjustments are made based on a variety of economic factors, and they can result in an increase or decrease of the policy interest rate.
When the policy rate is adjusted by the Bank of Canada, the banks usually increase or decrease their own prime interest rates by the same basis points.
In 2022, these announcements continually shared news of another increase in the policy interest rate, which resulted in near instantaneous increases in the prime interest rate being changed by financial institutions across the country.
The Bank of Canada explained that the increases were being made to combat the high levels of inflation in an effort to balance the Canadian economy.
The Bank of Canada started 2022 with a policy rate of 0.25%, and by the end of the year that rate sat at 4.25% – an increase of 4 percentage points.
4 ways Canada prime rate changes could impact you
The official Canada prime rate is published weekly by the Bank of Canada and is calculated as an average of the prime rate being charged by each of the 6 chartered banks in Canada.
It’s uncommon for Canada’s prime rate to change other than following one of the 8 annual announcements, but when Canada’s prime rate changes, it has significant impacts on the lives of everyday Canadians.
Here are some ways you could be impacted by Canada prime rate changes:
1. Your new mortgage rates
When Canada’s prime rate increases, the base rate for new mortgages increases too (the inverse is also true).
Banks will set their interest rate using the prime rate as a benchmark. For example, they may set their best mortgage rate at prime minus 1%, meaning that the lowest interest rate charged on a mortgage is 1% lower than whatever prime rate happens to be at the time.
This means if prime is 4.45% and you qualify for a prime minus 1% mortgage, your mortgage rate will be 3.45%.
2. Your existing mortgage rates
When you’re on a fixed mortgage, you have agreed to borrow money at a certain interest rate for a specific amount of time (usually 5 years). In this case, Canada prime rate changes will not impact you until it’s time to renew your mortgage.
Many mortgage holders choose a variable rate mortgage because the rates are usually significantly lower than those offered for a fixed mortgage. However, with a variable rate mortgage, the rate of interest you pay on your loan will increase or decrease along with the prime rate.
This will work out well for you if interest rates remain low, like they were in 2020 during the early months of the COVID-19 pandemic. However, if mortgage rates increase like they did throughout 2022, the cost of borrowing the funds needed for your home can climb quickly. Currently, the prime rate is 4.45% and several of the big banks’ variable interest rates are the same.
3. Your savings account rates
When the Canada prime rate increases, banks charge higher interest on money borrowed by their customers. This generates additional revenue for the bank.
On the flip side, the rate of interest banks pay customers to keep money in their savings accounts also increases, helping account holders earn a higher interest on their money and encouraging them to save.
4. Your loan interest rates
The same goes for interest rates on lines of credit and other loans. When the prime rate increases, the cost of borrowing increases.
Home equity lines of credit (HELOC) are variable and tied directly to prime interest rate, so when prime increases, the rate of interest being charged on your line of credit increases too.
What do you think about the impact of Canada prime rate changes?
What do you think about the recent Canada prime rate changes and how they’ve impacted mortgage, loans, and even savings account interest rates?
Have you seen a change in your own mortgage payments or savings account?
We want to hear your thoughts. Please let us know in the comments below.
FAQ
How often does the prime rate change?
Canada prime rate usually doesn’t change unless the Bank of Canada increases or decreases its policy interest rate. In 2022, this happened 7 times in response to high inflation rates.
When did prime rate last change?
The last Canada prime rate change followed the Bank of Canada overnight rate announcement on June 5, 2024.
Why is prime rate so important?
Canada prime rate is the base interest rate used to determine the cost of borrowing. It impacts the rate of interest paid on mortgages and loans, and interest earned on account balances.
Leave a comment
Comments