The prime rate, explained

What is the prime rate?

The prime rate is a reference rate that a financial institution uses to price its variable-rate lending. Each institution sets its own prime as a function of its funding cost, and that funding cost is influenced by the Bank of Canada's target for the overnight rate, the policy interest rate.

The Bank of Canada publishes a weekly typical prime rate for the chartered banks. You'll find the latest figure and its date on our benchmarks page.

Prime is a lender's own reference point, not necessarily the rate you pay. Depending on the product and the offer, your rate might sit above or below it. The distance either way is the spread, and it is set in your agreement when you sign. So when someone says "rates went up", the useful follow-up question is whether prime moved, whether your spread changed, or both.

Why does prime move?

Prime moves when a lender's funding costs move, and the biggest influence on those costs is the policy rate. So when the Bank of Canada changes the policy rate, lenders usually change prime soon afterwards, typically by the same amount.

When the policy rate has moved after the latest published prime figure, the checker estimates prime by adding that move and labels it as an estimate. For the full chain from announcement to your accounts, see how the Bank of Canada rate affects you.

Which rates are priced off prime?

Fixed-rate loans, including fixed-rate mortgages during their term, aren't tied to prime. Their rate is set when you sign. If you're unsure which kind you have, your agreement or your latest statement will say whether the rate is fixed or variable and, if variable, what it is linked to.

• Variable-rate mortgages, generally quoted as prime plus or minus a spread. See how variable-rate payments work.
• Home equity lines of credit (HELOCs). HELOC rates are variable; a HELOC can be up to 65% of the home's value, and combined with a mortgage, borrowing can usually reach up to 80%.
• Unsecured personal lines of credit, which have no home as security and are priced separately from HELOCs.
• Some other loans. Check your agreement for any reference to prime.

Why does the spread matter so much?

Prime moves for every borrower at the same lender alike. The spread is what makes your offer better or worse than someone else's, and it lasts as long as the balance does. Take an illustrative $75,000 HELOC balance at two offers half a point apart: 5.45% costs $375 more over a year than 4.95%, or $340.63 a month in interest instead of $309.38.

Whatever prime does next, that gap stays. Run your own balance in the HELOC interest calculator, and see the HELOC script for wording when you ask about the spread.

How does the checker judge a prime-linked rate?

It compares the full rate you pay, not the spread alone, with the Bank of Canada's effective rate on new credit of the same kind, moved by any policy-rate change since the published month. For a HELOC that is "the lowest published rate for the same term and insurance class in Ontario"; for an unsecured line it is "Effective rate on new unsecured personal lines of credit".

An illustrative $75,000 HELOC at 4.95% gets a mark of 98 out of 100 ("grade A+"), 0.15% below a best published rate of 5.10%; the gap is worth about $113 over a year on this balance. An illustrative unsecured line at 9.45% gets a mark of 56 ("Worth negotiating") against 8.03%. Check your own in the HELOC checker or line of credit checker.

What should I check in a prime-linked agreement?

The glossary defines the terms you'll meet, and line of credit rates explained covers unsecured lines in more depth.

1. Which prime rate applies: the lender's own, and where it is published.
2. The spread, and whether the agreement allows it to change.
3. How and when you'll be told about a rate change.
4. How interest is calculated and charged.
5. For a variable mortgage, whether the payment changes when prime moves.