The prime rate is a crucial factor in the Canadian financial landscape, influencing borrowing costs for individuals and businesses. Understanding how the prime rate works and its impact on your finances is essential for making informed decisions about loans, mortgages, and other credit products. This guide will examine the prime rate, from how it is determined to its historical changes and forecasted direction.
What is the Prime Rate in Canada?
The prime rate, also called the prime lending rate, is an annual benchmark interest rate set by major Canadian financial institutions. It is the basis for the interest rates lenders charge consumers on variable-rate loans and lines of credit, including variable-rate mortgages, home equity lines of credit (HELOCs), personal loans, student loans, and some credit cards.
Essentially, the prime rate is the core lending rate used across the Canadian banking system, directly impacting the borrowing costs for millions of Canadians.
Current Prime Rate in Canada
The current prime rate in Canada stands at 4.95%. This rate has been influenced by the Bank of Canada’s recent policy interest rate decisions, which aim to keep inflation within the target range of 1% to 3%.
This is the standard prime rate across most major banks in Canada: RBC Royal Bank, TD Bank*, Scotiabank, CIBC, BMO, National Bank, etc.
This prime rate has been in effect since March 12, 2025, when the Bank of Canada dropped the rate by 25 basis points from 5.20%. Then it remains unchanged after the BoC decided to hold its policy rate on April 16 and June 04, 2025.
*TD set their own prime rate at 5.10% for its mortgage products.
Historical Prime Rate in Canada
Canada’s prime rate has fluctuated over the years. There are 3 main factors that can influence changes in the prime rate, including:
- Financial market conditions: Global economic events, changes in bond yields, and other market forces can influence the cost of funds for financial institutions and, in turn, affect the prime rate.
- Economic conditions: The state of the Canadian economy, including inflation, employment, and GDP growth, can impact the Bank of Canada’s monetary policy decisions and, consequently, the prime rate.
- Monetary policy: The Bank of Canada’s decisions to raise, lower, or maintain the overnight rate target directly affect the prime rate.
Here’s a look at the prime rate changes since 2008.
| Effective Date | Prime Rate | Change |
|---|---|---|
| 04 June 2025 | 4.95% | – |
| 16 April 2025 | 4.95% | – |
| 12 March 2025 | 4.95% | -0.25% |
| 29 January 2025 | 5.20% | -0.25% |
| 11 December 2024 | 5.45% | -0.50% |
| 23 October 2024 | 5.95% | -0.50% |
| 4 September 2024 | 6.45% | -0.25% |
| 24 July 2024 | 6.70% | -0.25% |
| 5 June 2024 | 6.95% | -0.25% |
| 12 July 2023 | 7.20% | +0.25% |
| 7 June 2023 | 6.95% | +0.25% |
| 25 January 2023 | 6.70% | +0.25% |
| 7 December 2022 | 6.45% | +0.50% |
| 26 October 2022 | 5.95% | +0.50% |
| 6 September 2022 | 5.45% | +0.75% |
| 13 July 2022 | 4.70% | +1.00% |
| 1 June 2022 | 3.70% | +0.50% |
| 13 April 2022 | 3.20% | +0.50% |
| 2 March 2022 | 2.70% | +0.25% |
| 29 March 2020 | 2.45% | -0.50% |
| 16 March 2020 | 2.95% | -0.50% |
| 4 March 2020 | 3.45% | -0.50% |
| 24 October 2018 | 3.95% | +0.25% |
| 11 July 2018 | 3.70% | +0.25% |
| 17 January 2018 | 3.45% | +0.25% |
| 6 September 2017 | 3.20% | +0.25% |
| 12 July 2017 | 2.95% | +0.25% |
| 15 July 2015 | 2.70% | -0.15% |
| 27 January 2015 | 2.85% | -0.15% |
| 8 September 2010 | 3.00% | +0.25% |
| 20 July 2010 | 2.75% | +0.25% |
| 1 June 2010 | 2.50% | +0.25% |
| 21 April 2009 | 2.25% | -0.25% |
| 3 March 2009 | 2.50% | -0.50% |
| 20 January 2009 | 3.00% | -0.50% |
| 9 December 2008 | 3.50% | -0.50% |
| 21 October 2008 | 4.00% | -0.35% |
Prime Rate vs. Bank of Canada Overnight Rate
The prime rate does not stay stagnant. It fluctuates regularly in response to the Bank of Canada overnight rate, also known as the policy interest rate. While the prime and overnight rates are different benchmarks, they have a very close relationship:
- The overnight rate is the interest rate the Bank of Canada charges commercial banks for short-term loans. It serves as the foundation of the Bank’s monetary policy.
- The prime rate is the actual lending rate used by commercial banks. It tends to sit about 200 basis points (2 percentage points) above the overnight rate.
- When the Bank of Canada raises the overnight rate, banks face higher borrowing costs. In turn, they raise their prime rates to maintain loan profit margins.
- Conversely, lowering the overnight rate reduces banks’ costs. This allows them to cut their prime rates accordingly.
So while the prime and overnight rates are separate, the latter dictates the direction of the former. When the overnight rate shifts up or down, the prime rate follows accordingly.
How is the Prime Rate set in Canada?
The typical prime rate-setting process unfolds as follows:
- The Bank of Canada adjusts its benchmark overnight interest rate, usually in 0.25% increments.
- Shortly after, Canada’s Big Six banks all announced identical changes to their prime rates, effective on the same new date.
- Smaller financial institutions adopt similar prime rate changes to stay competitive.
- The new prime rate remains fixed until the next Bank of Canada announcement triggers a shift.
So while each bank controls its own prime rate, market dynamics drive uniformity across the board. This allows the overnight rate to dictate the prevailing prime rate in Canada.
How does the Prime Rate Affect the Borrowing Costs?
The prime rate has a significant influence on Canadian borrowing costs.
Impacts on Variable Rate Loans and Lines of Credit
The prime rate directly affects the interest rates on variable-rate loans and lines of credit in Canada. When you have a variable-rate loan or line of credit, your interest rate is expressed as the prime rate plus or minus a certain percentage (e.g., prime + 1% or prime – 0.5%). As the prime rate fluctuates, so does the interest rate on your loan or line of credit.
Affect Monthly Payments
For variable-rate mortgages and loans with set monthly payments, the impact of prime rate changes is a bit nuanced:
- If the prime rate rises, more of the monthly payment will go toward interest and less toward principal, prolonging the debt repayment timeline.
- A prime rate fall has the opposite effect – less is paid in interest and more toward principal, which can accelerate repayment.
Fixed vs. Variable Rate Decisions
The expected direction of the prime rate can influence consumers’ decisions about variable and fixed-rate products. If the prime looks set to rise steadily, fixed rates may be preferable to shelter from increasing variable loan costs.
Prime Rate Forecasts and Predictions
Forecasting where the prime rate is headed involves analyzing the Bank of Canada’s monetary policy outlook. In 2025, economists expect some further easing as inflationary pressures continue fading:
| Date | BoC Rate | Prime Rate |
|---|---|---|
| 2025-06-30 | 3.00% | 5.20% |
| 2025-12-31 | 2.75% | 4.95% |
Various factors like global growth and oil prices could alter the Bank of Canada’s rate policy and prime rate trajectory. Overall, though, the forecast points to a bit more potential relief for variable-rate borrowers.
How does the Prime Rate in Canada compare globally?
The US prime rate tends to be similar to Canada’s, typically sitting about 300 basis points above the US Federal Reserve’s benchmark rate. US banks independently set their prime rates but remain relatively aligned under competitive pressures.
Mechanisms for setting benchmark lending rates vary across the world:
- In the UK, there is no officially published prime rate. Lenders set their own internal reference rates.
- Australia relies on the cash rate set by its central bank, which strongly influences commercial lending rates.
- The eurozone has a single benchmark rate (EURIBOR) that directly affects lending rates across all member countries.
So while not labelled uniformly as a prime rate, many countries have analogous reference interest rates guiding consumer lending rates.
Managing the Impact of Prime Rate Changes as a Borrower
Canadians with variable-rate debts face interest rate risk from shifting prime rates. Some strategies to manage this include:
- Choosing fixed-rate loans or locking in a mortgage rate for the full term when prime rates seem likely to rise significantly.
- If the prime rate drops, refinancing at a lower variable rate with another lender.
- Budgeting conservatively for potential rate hikes by maintaining cash reserves and minimizing expenses.
- Discussing options with lenders early if rate hikes create unaffordable payment increases. They may offer solutions like extending amortization periods.
- Consulting qualified financial advisors to design personalized debt and risk management strategies.
Proactively planning for ups and downs in the prime rate can help consumers save money and avoid payment pitfalls.
FAQs about Canada Prime Lending Rate
Does the prime rate affect fixed-rate mortgages?
No, fixed-rate mortgages remain unchanged for the full mortgage term, regardless of prime rate fluctuations. Only variable-rate mortgages are directly impacted.
How often does the prime rate change in Canada?
The prime rate can potentially change up to 8 times per year following the Bank of Canada's scheduled policy announcements. Recent years have seen between 5 and 7 prime rate adjustments annually.
How is the Canada prime rate different from the US?
The US prime rate is set independently by each bank, while Canada's major banks align. US prime generally sits 300 bps above the Fed funds rate versus 200 bps for Canada's prime over the BoC overnight rate.
Will the prime rate go up or down in 2025?
Economists expect the Bank of Canada to cut its overnight rate further in 2025, potentially causing the Canadian prime rate to drop further below 5%.
Does the prime rate include mortgage insurance?
No, the prime rate is separate from mortgage insurance. Mortgage insurance premiums are added onto your principal amount financed and interest rate.
How does the prime rate change affect mortgage payments?
A higher prime rate means more of your payment goes to interest. A lower prime rate increases the principal portion. But unless you refinance, the payment itself stays the same.
How can I get the best prime rate?
The major banks tend to have the same prime rate. Maintaining a high credit score can help secure the lowest rate.
The Bottom Line
As Canada’s central monetary benchmark for variable-rate lending, the prime rate tremendously influences millions of borrowers’ interest costs and payments. Tracking its trajectory provides insight into the shifting landscape of lending rates and the general pulse of the Canadian economy.
For Canadians with debts tied to the prime, carefully following the rate offers the chance to maximize savings when it falls, but also prudently prepare for the impacts of future rate hikes. With monetary policy indicating potentially more prime rate easing on the horizon, variable rate borrowers can breathe easier but should remain vigilant.
