Who sets the prime rate?

Each lender sets its own prime rate, but they move it in line with the Bank of Canada's policy rate. The major banks typically post the same prime, so it acts as a near-universal benchmark.

Does prime affect my fixed-rate mortgage?

No. A fixed-rate mortgage keeps the same rate for the entire term regardless of prime. Only variable-rate mortgages, HELOCs, and other floating loans move with prime.

What is the difference between prime and the policy rate?

The policy rate is set by the Bank of Canada for lending between financial institutions. Prime is the consumer-facing base rate lenders derive from it, usually sitting a couple of percentage points above the policy rate.

Mortgage Glossary

What is Prime Rate?

The prime rate is the benchmark interest rate Canadian banks use as a base for pricing variable-rate loans, including variable mortgages and lines of credit. It moves in step with the Bank of Canada's policy interest rate. Variable mortgage rates are quoted as prime plus or minus a set amount, so when prime changes, those rates change too.

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Quick answer

Also known as: prime lending rate

Key points

The base rate banks use to price variable-rate loans and lines of credit.
Moves in step with the Bank of Canada's policy interest rate.
Variable mortgages are quoted as prime plus or minus a fixed spread.
When prime changes, variable rates and payments change with it.
Fixed-rate mortgages are not tied to prime during their term.

Prime Rate explained

The prime rate is the reference rate lenders use to set pricing on variable-rate products. It is not set directly by the Bank of Canada, but it tracks the Bank's policy (overnight) interest rate closely: when the Bank raises or lowers its policy rate, banks almost always move prime by the same amount. Each lender sets its own prime, though the major banks usually post the same figure.

Variable mortgages are quoted relative to prime, such as prime minus 0.50% or prime plus 0.20%. The spread is fixed for your term, but prime itself can move during the term. So if prime rises, your variable mortgage rate rises with it, and if prime falls, your rate drops. Fixed-rate mortgages, by contrast, are not tied to prime and stay constant for the term.

What a Prime Rate is for

Prime exists to give lenders a transparent, common base for pricing loans whose rates float with the cost of money. It links consumer borrowing costs to monetary policy, so that when the central bank tightens or loosens, the change flows through to variable mortgages, HELOCs, and lines of credit. It lets lenders manage interest-rate risk while offering borrowers floating-rate products.

How it can help you

Knowing how prime works helps you understand why your variable payment or HELOC interest moves and lets you anticipate the impact of Bank of Canada decisions. It also clarifies how to compare variable offers: a deeper discount to prime means a lower rate for the whole term. Because lenders compete on the spread they offer below prime, Lenderoo lets you compare variable-rate offers across 40+ lenders for free so you can lock in the best discount.

When it comes up

A borrower holds a variable mortgage at prime minus 0.60%. When the Bank of Canada raises its policy rate by 0.25%, the lender lifts prime by the same 0.25%, and the borrower's rate rises accordingly. Because they understood the link, they had already budgeted for higher payments and were not caught off guard.

Example: how a prime change moves your rate

Say prime is 6.95% and your variable mortgage is set at prime minus 0.60%, giving you a rate of 6.35%.

The Bank of Canada cuts its policy rate by 0.25%. Lenders lower prime to 6.70%, so your variable rate falls to 6.10%. Your discount of 0.60% stays fixed for the term; it is the prime base that moved. On a $300,000 mortgage, that 0.25% drop could trim roughly $40 to $45 from your monthly interest.