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
| Term | What It Is | 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:
| Period | 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
FAQ
Q: Is the prime rate the same at all banks?
A: Major banks typically have the same prime rate, though some smaller lenders may differ slightly.
Q: How quickly does my rate change after a BoC announcement?
A: Usually within 1-3 business days.
Q: Can I lock into a fixed rate mid-term if prime rises?
A: Many lenders allow conversion to fixed, though terms vary. Check your mortgage contract.
Q: What's a good variable rate discount?
A: Prime minus 0.50% to prime minus 1.00% is competitive. Discounts vary by lender and your profile.
Q: Does prime affect my fixed-rate mortgage?
A: No. Fixed rates follow bond yields, not prime. Your rate stays constant regardless of prime changes.
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.
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