How Does the Prime Rate Affect you?
How Does the Prime Rate Affect You?
On Dec 11th, 2024 the Bank of Canada has cut its overnight key interest rate by 50 bps to 3.25%, aiming to stimulate economic growth amid uncertainties like proposed U.S. tariffs and reduced immigration targets. Governor Tiff Macklem signaled a cautious approach to future rate adjustments, focusing on fostering growth and maintaining inflation near 2%.
Key Points:
- The 50 bps cut is the second in a row, aiming to move away from restrictive monetary policy.
- Reduced immigration and trade uncertainties could impact the economy.
- Consumer spending and housing activity have improved, but weak business investment and exports weigh on growth
I have received so many calls and emails from clients and potential borrowers asking how the drop in the Bank of Canada’s overnight rate affects their existing mortgage.
The answer is: it depends whether you are in a Fixed, Variable or Adjustable Rate mortgage!!
But first, let’s go back to some basics:
Fixed-rate mortgage rates in Canada are priced off of Government of Canada 5-year bond yields that are, in turn, influenced by the U.S. Treasuries.
Variable-rate mortgages are affected by the Bank of Canada's monetary policy, namely interest rate hikes and cuts that, in turn, impacts commercial banks' Prime lending rate.
Understanding the Prime Rate in Canada:
The Prime Rate is the interest rate that major banks in Canada use to set interest rates for variable loans/mortgages and lines of credit. It’s influenced by the Bank of Canada’s Overnight Rate, which is the rate at which banks borrow and lend to each other overnight.
Consider the prime rate as the foundation upon which these other interest rates are built. As the prime rate in Canada fluctuates, the interest rate you pay on your adjustable/variable rate mortgage also adjusts accordingly.
If you are like me, and you like to look at numbers, here is a table summarizing the Prime Rate changes in Canada from 2010 to 2024: This table captures the key changes in the prime rate along with the dates and the magnitude of changes from 2010 to 2024.
| Effective Date | Prime Rate | Change |
|---|---|---|
| Dec 11th, 2025 | 5.45% | -0.50% |
| October 23, 2024 | 5.95% | -0.50% |
| Sept 4, 2024 | 6.45% | -0.25% |
| July 24, 2024 | 6.70% | -0.25% |
| June 5, 2024 | 6.95% | -0.25% |
| July 12, 2023 | 7.20% | +0.25% |
| June 8, 2023 | 6.95% | +0.25% |
| January 25, 2023 | 6.70% | +0.25% |
December 8, 2022 | 6.45% | +0.50% |
| October 27, 2022 | 5.95% | +0.50% |
| September 8, 2022 | 5.45% | +0.75% |
| July 14, 2022 | 4.70% | +1.00% |
June 2, 2022 | 3.70% | +0.50% |
April 14, 2022 | 3.20% | +0.50% |
| March 3, 2022 | 2.70% | +0.50% |
| March 30, 2020 | 2.45% | -0.50% |
| March 17, 2020 | 2.95% | -0.50% |
| March 5, 2020 | 3.45% | -0.50% |
October 25, 2018 | 3.95% | +0.25% |
| July 12, 2018 | 3.70% | +0.25% |
| January 18, 2018 | 3.45% | +0.25% |
| September 7, 2017 | 3.20% | +0.25% |
| July 13, 2017 | 2.95% | +0.25% |
| July 16, 2015 | 2.70% | -0.15% |
| January 28, 2015 | 2.85% | -0.15% |
| September 9, 2010 | 3.00% | +0.25% |
| July 21, 2010 | 2.75% | +0.25% |
| June 2, 2010 | 2.50% | +0.25% |
If you have an Adjustable or Variable rate mortgage or a line of credit, your interest payments will fluctuate with changes in the prime rate. Changes in the prime rate can also impact the interest rates on savings accounts and other investments.
For Those Who Already Have a Mortgage
Adjustable Rate Mortgage: Your payments will decrease by approximately $30 per month for every $100,000 you owe.
Variable Rate Mortgage: Some mortgages have static payments, and despite that your interest rate will go down, you will not see a decrease in your mortgage payment. Simply, more of your payment will go towards the principal, and less towards interest.
Fixed Rate Mortgage: There will be no changes.
For Those Who Are Getting a Mortgage (Pre-approved or Approved)
Adjustable/Variable Rate Mortgage: Your pre-approval or approval will have its "prime rate" lowered, and your estimated payments will decrease by approximately $30 per month for every $100,000 you are about to borrow.
Fixed Rate Mortgage: There are no significant changes to the fixed rates at this time. Fixed mortgage rates are closely tied to the yields on Government of Canada bonds, particularly the 5-year bond yield. As bond yields rise or fall, fixed mortgage rates tend to follow.
As always, I am here to answer any mortgage related questions that you may have and help you crunch any numbers that you don’t quite understand - book a call here.