Glossary
Prime Rate
The prime rate is the interest rate Canadian banks charge their most creditworthy borrowers, and it is the benchmark used to price variable-rate mortgages and lines of credit..
The prime rate is the interest rate Canadian banks charge their most creditworthy customers, and it acts as the benchmark from which variable-rate mortgages, home equity lines of credit, and many other loans are priced. Each lender sets its own prime rate, and the major banks generally move together.
How the prime rate is set in Canada
Prime is not a government rate. It tracks the policy interest rate set by the Bank of Canada, which targets the overnight rate at which large financial institutions lend to one another. When the Bank changes that target, the major banks typically adjust prime by the same amount in short order, though they are not obliged to. Prime sits above the policy rate, reflecting funding costs and lending margin. Because each institution posts its own number, a mortgage quoted as "prime minus" or "prime plus" is always anchored to that particular lender's prime.
Why the prime rate matters to a mortgage borrower
Variable-rate mortgages are quoted as a spread against prime — for instance, prime minus a discount, or prime plus an adjustment. The spread is negotiated at approval and usually holds for the mortgage term, while prime itself floats.
- Adjustable-rate variable mortgage: the payment moves up or down as prime moves.
- Static-rate variable mortgage: the payment stays level while the split between interest and principal shifts.
- Fixed-rate mortgage: not tied to prime after closing; priced mainly off bond yields and lender funding costs.
The same benchmark drives home equity lines of credit, which are usually priced at prime plus a spread. See the prime rate guide for how the spread is negotiated.
Prime, the stress test, and qualification
Lenders publish a posted rate alongside their discounted rates, and the federal mortgage stress test requires federally regulated lenders to confirm a borrower could still afford payments at a qualifying rate above the contract rate. For variable-rate mortgages, that qualifying rate is built from prime, so shifts in prime can change both what a borrower pays and what they must prove they can pay. Because prime is a moving benchmark, a variable-rate borrower's GDS and TDS ratios are tested against a rate that can change over the term. Review the current policy rate and prime before comparing offers, and confirm each lender's own posted prime.
Frequently asked questions
Is the prime rate the same as the Bank of Canada rate?
No. The Bank of Canada sets a target for the overnight rate, which guides short-term borrowing between financial institutions. The prime rate is a commercial lending rate set by each bank, and it normally sits above that policy rate. Banks typically pass policy rate changes through to prime, but the two numbers are not identical.
Do all Canadian banks have the same prime rate?
Major banks usually post the same prime rate because they tend to move together when the Bank of Canada changes its policy rate. Smaller institutions, credit unions, and alternative lenders sometimes post a different prime. Always confirm the specific lender's posted prime, since a quoted "prime minus" discount is calculated against that lender's own figure.
Does a fixed mortgage payment change when prime moves?
No. A closed fixed-rate mortgage sets its interest rate for the term, so payments do not change when prime rises or falls. Prime matters mainly for variable-rate mortgages, adjustable-rate products, and lines of credit. At renewal or refinance, the fixed rate you are offered may reflect the rate environment at that time.
Sources
Related terms
- Policy Interest Rate — The Bank of Canada's target for the overnight rate, which anchors short-term borrowing costs and influences Canadian mortgage pricing.
- Posted Rate — A posted rate is the headline mortgage rate a lender publishes publicly, and it is usually higher than the discounted rate most borrowers actually receive.
- Variable-Rate Mortgage — A mortgage whose interest rate rises and falls with the lender's prime rate during the term instead of staying fixed.
- Mortgage Stress Test — The federal mortgage stress test is a qualification rule that makes lenders check whether you could afford your mortgage if rates were higher than your contract rate.
- Adjustable-Rate Variable Mortgage — An adjustable-rate variable mortgage ties the interest rate to a lender's prime rate, so the periodic payment rises or falls as prime moves.