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.

August 2024: Mortgage market update

The 2024 Canadian housing market has been rather sleepy thus far, as buyers bide their time on the sidelines and await lower rates. With the Bank of Canada having implemented its second consecutive policy rate cut in a row on July 24 and taking the policy rate from 4.75% to 4.5%, 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 September 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 2.9% range in the wake of the Bank of Canada’s July 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 August 15, 2024, the Canadian Real Estate Association (CREA) came out with the most recent statistics for the Canadian housing market for the month of July 2024. The latest data shows that the market was relatively slow in July, likely a result of buyers holding out for lower rates now that the Bank of Canada is in a rate cutting cycle. The 43,485X homes that traded hands represented a monthly decline of -0.7%, though still up by 4.8% compared to the same period last year. Sellers, however, continue to turn out in force, with new listings up by 12.7% from July 2023. As a result, July’s sales-to-new-listings ratio (SNLR) came in at 52.7%, keeping the country firmly in balanced market territory. CREA considers a ratio between 45 - 65% to indicate a balanced market, with above and below that threshold reflecting sellers’ and buyers’ markets, respectively. An abundance of new listings and relatively slack demand has led to a price decline, with July’s national average home price of $667,317 down by -0.2% on an annual basis (and less than June’s figure of $696,179).

  Read

  more: July home sales fizzle as buyers await more rate cuts
• CPI update: The latest Consumer Price Index (CPI) reading for the month of July 2024 from Statistics Canada indicates that headline inflation came in at 2.5%, in line with expectations and down from 2.7% the previous month. This decrease can be attributed in large part to falling prices for travel tours, passenger vehicles and electricity. That said, when examined on a monthly basis, the CPI actually rose by 0.3%, driven by rising gas prices, which climbed by 2.4% in July. However, food costs increased at a slower rate from the previous month, from 0.6% to 0.3%. A major contributor to inflation, shelter costs (including mortgage interest costs and rent costs) saw a drop, coming in at 5.7% in July vs. 6.2% in June. This was largely due to the Bank of Canada’s June and July rate cuts, which caused mortgage interest costs to fall by -1.3%, coming in at 21% in July compared to 22.3% in June. Rent costs saw a slower decline of -0.3%, remaining elevated at 8.5%. Two core inflation measures closely watched by the Bank, CPI Trim and CPI median, rose at a slower pace than in previous months, coming in at 2.7% and 2.4%, respectively.

Read more: Canadian CPI lowers to 2.5% in July

2024 Housing market forecast

CREA has now updated its national housing market forecast, taking into account that there are likely to be fewer rate cuts from the Bank of Canada than initially anticipated as well as a rapid growth in supply coupled with sluggish demand.

CREA is now forecasting a total of 492,395 homes to change hands in 2024, up by 6.1% from 2023. This has been revised downward from an earlier forecast that saw a total of 492,083 transactions (a 10.5% increase over 2023).

In 2025, the association is predicting a total of 501,902 home sales, representing a 6.3% increase from 2024, spurred by falling interest rates and rising demand. This projection is down from the earlier forecast of 530,494 home sales (a 7.8% increase over 2023).

CREA expects the national average home price to rise by a total of 2.5% in 2024 to reach $694,393, followed by another 5% increase in 2025, taking it to $729,319. Previously, CREA had been projecting a 4,9% rise in 2024 (for an average home price of $710,120) and a 7% rise in 2025 (for an average home price of $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 sixth announcement of the year on September 4, it carried out the third rate cut in a row after not having done so for over four long years, citing declining inflation in Canada, the US and beyond as the primary driver of its decision. With the overnight lending rate having fallen from 4.5% to 4.25%, the prime rate will fall to 6.45%.

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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