Prime Lending Rate
What is the Prime Lending Rate?
This article has been updated for 2018:
The Bank of Canada sets the “Bank Rate”. The Bank Rate is the main “lever” that the Bank of Canada uses to conduct monetary policy. This is the rate that the BOC sells money to the banks. The banks then add on their profit margin and call this the Prime lending rate, which is the rate that they base mortgages, lines of credit and loans on, to lend to the consumer. Different banks may have different Prime Lending rates.
The Bank Rate, also known as the overnight rate is adjusted from time to time to help ensure a low inflation environment favorable for long-lasting growth and job creation. Changes in the Bank Rate typically lead to changes in the Prime lending rate and typically by the same percentage, however, this is not always the case.
Higher interest rates mean that people are likely to borrow less, spend less, and save more. This reduces the amount of money in circulation and acts as a brake on inflation. Lower interest rates encourage borrowing and spending, and increased economic activity.
Movement of Prime Rate Over Past 18 years:
The figures below show the start of the year and the end of the year. Slight fluctuations did take place between the two figures.
2016 - 2.70% to 2.70%
2015 - 3.00% to 2.70%
2014 - 3.00% to 3.00%
2013 - 3.00% to 3.00%
2012 - 3.00% to 3.00%
2011 - 3.00% to 3.00%
2010 - 2.25% to 3.00%
2009 - 3.50% to 2.25%
2008 - 6.25% to 3.50%
2007 - 6.00% to 6.25%
2006 - 5.00% to 6.00%
2005 - 4.25% to 5.00%
2004 - 3.75% to 4.25%
2003 - 4.50% to 4.50%
2002 - 3.75% to 4.50%
2001 - 7.25% to 4.00%
2000 - 6.50% to 7.50%
1999 - 6.75% to 6.25%
1998 - 6.00% to 6.75%
So, what can we tell from this?
- For the last 5 years the prime rate has averaged at 2.9%.
- When prime moves, it does not move too dramatically – usually a quarter of a point ( .25%) (often referred to as bps or basis points) at a time.
- If you choose a Variable Rate Mortgage (VRM) (which is based on prime) your rate fluctuates with prime and so does your payment. There are some lenders whereby your payment can remain the same; however, I do not recommend this.
- If you set your payment higher than the rate, then more of your monthly payment is going towards the principal, substantially reducing your overall balance and the number of years you will be paying this mortgage.
- You can lock into a discounted fixed-term rate at any time at no cost.
All rate announcements will be made at 10:00 (EST) by the Bank of Canada.
The scheduled announcement dates for 2018 are as follows:
- Wednesday, January 17*
- Wednesday, March 7
- Wednesday, April 18*
- Wednesday, May 30
- Wednesday, July 11*
- Wednesday, September 5
- Wednesday, October 24*
- Wednesday, December 5
*Monetary Policy Report published as well
If at any time I feel that you would benefit from locking into a fixed rate, I would be sure to inform you along with the rest of my variable rate mortgage clients.
Please feel free to ask me any questions.