You have a variable-rate mortgage quoted as "prime minus 0.50%" and just heard the Bank of Canada cut rates. Will your payment drop? By how much? Understanding the prime rate—and how it flows through to your mortgage—helps you anticipate changes and plan accordingly. What Is the Prime Rate? The prime rate is the interest rate that banks use as a benchmark for variable-rate lending products. When you see a variable mortgage quoted as "prime minus 0.50%," your rate is calculated from this benchmark. Current prime rate: Major banks typically set prime at 2.20% above the Bank of Canada overnight rate. How Prime Rate Is Set The prime rate follows a predictable pattern: Bank of Canada sets the overnight rate (8 times per year) Major banks adjust prime accordingly (usually within days) Your variable rate moves with prime While banks technically set their own prime rates, major Canadian banks almost always move in lockstep. Prime Rate vs Overnight Rate Who Sets It Overnight Rate Rate banks charge each other for overnight loans Bank of Canada Prime Rate Benchmark for consumer lending Individual banks Your Variable Rate Prime ± your discount/premium Your mortgage contract Typical relationship: Prime = Overnight Rate + 2.20% How Prime Affects Your Mortgage Variable Rate Mortgages Your rate is tied directly to prime: Example: Prime rate: 5.95% Your discount: Prime - 0.50% Your rate: 5.45% When prime drops 0.25%, your rate drops to 5.20%. Adjustable vs Fixed-Payment Variable Adjustable Payment: Payment changes when prime changes Budget impact is immediate Amortization stays consistent Fixed-Payment Variable: Payment stays the same Allocation between principal and interest shifts Watch for "trigger rate" concerns Historical Prime Rate Trends Prime rate has varied dramatically over the decades: Prime Rate Range 1980s 10% - 22% 1990s 5% - 14% 2000s 4% - 6% 2010-2020 2.5% - 4% 2022-2024 4.5% - 7.2% Key insight: Today's rates are historically moderate, despite feeling high compared to the 2010s. Products Affected by Prime Rate Variable Mortgages Move directly with prime Often quoted as prime ± a discount/premium HELOCs Typically prime + 0.50% to prime + 1.00% Rate adjusts immediately with prime changes Personal Lines of Credit Usually prime + 1% to prime + 3% Unsecured lines have higher premiums Some Credit Cards Variable-rate cards are tied to prime Though most Canadian cards are fixed-rate What Happens When Prime Changes? Your Lender Notifies You Usually within a few days of BoC announcement New rate effective almost immediately For Adjustable Payments Your payment changes on the next payment date Budget accordingly For Fixed Payments Payment stays the same More goes to interest (if prime rises) or principal (if prime falls) Check if you're approaching trigger rate territory Understanding "Prime Minus" vs "Prime Plus" Prime Minus (Discount): Prime - 0.50% means you pay 0.50% less than prime Better deal, typically offered to strong borrowers Prime Plus (Premium): Prime + 0.50% means you pay 0.50% more than prime Common for HELOCs or higher-risk borrowers The discount or premium is locked in your contract for the term. Should You Choose a Prime-Based Mortgage? Advantages Historically saves money over most 5-year periods Lower penalties if you break early Benefit immediately from rate cuts Disadvantages Payment uncertainty Risk of rates increasing Requires financial flexibility What's Next Understanding prime helps you anticipate how Bank of Canada decisions affect your finances. Contact our team to discuss whether a prime-based variable mortgage fits your situation and risk tolerance. Ready to Get Started? Contact us today for personalized mortgage advice and competitive rates. Get Pre-Approved Call (416) 822-7357 Frequently Asked Questions What Is the Prime Rate? The prime rate is the interest rate that banks use as a benchmark for variable-rate lending products. When you see a variable mortgage quoted as "prime minus 0.50%," your rate is calculated from this benchmark. Current prime rate: Major banks typically set prime at 2.20% above the Bank of Canada overnight rate. What Happens When Prime Changes? Usually within a few days of BoC announcement New rate effective almost immediately Your payment changes on the next payment date Budget accordingly Payment stays the same More goes to interest (if prime rises) or principal (if prime falls) Check if you're approaching trigger rate territory Should You Choose a Prime-Based Mortgage? Historically saves money over most 5-year periods Lower penalties if you break early Benefit immediately from rate cuts Payment uncertainty Risk of rates increasing Requires financial flexibility
