Decoding the Canadian Prime Rate: What Homeowners Need to Know
The Canadian prime rate is a cornerstone of borrowing costs, influencing everything from variable mortgages to lines of credit. While often reacting to decisions made by the Bank of Canada, the prime rate is ultimately set by lenders and applied to consumer credit products. For buyers and homeowners, understanding how it works is often more valuable than trying to predict its future movements.
The Key Takeaways
- The prime rate serves as the benchmark for lenders offering variable mortgages and lines of credit.
- It moves in tandem with the overnight rate, but remains determined by financial institutions.
- Grasping its mechanics is more crucial than short-term rate forecasting.
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What is the Canadian Prime Rate?
Unlike the Bank of Canada’s overnight rate, the prime rate isn’t dictated by the central bank. It’s a commercial reference rate established by banks and mortgage lenders, then applied to consumer credit products like variable-rate mortgages (VRMs), adjustable-rate mortgages (ARMs), and Home Equity Lines of Credit (HELOCs). While it generally follows Bank of Canada decisions, lenders retain some flexibility.
Although each financial institution technically sets its own prime rate, Canada’s major banks typically align to remain competitive. This reference rate usually adjusts in parallel with the Bank of Canada’s overnight rate – the rate at which the central bank lends to financial institutions overnight.
Current Canadian Prime Rate
As of January 31, 2026, the prime rate in Canada is 4.45% across major banks and lenders, including RBC, TD, BMO, Scotiabank, CIBC, and National Bank. TD Bank maintains a slightly higher rate (4.45% + 0.15%) specifically for its variable mortgage products.
The prime rate has remained stable since the Bank of Canada adjusted its overnight rate to 2.25%, reflecting a cautious approach amidst economic uncertainty and persistent core inflation.
Historical Canadian Prime Rate & Its Importance for Borrowers
The Canadian prime rate has fluctuated significantly over the decades, influenced by inflation, central bank monetary policy, and broader macroeconomic events. Understanding this history is crucial for borrowers.
The Early Years & Post-War Stability (1935-1960s)
Following the creation of the Bank of Canada in 1935, interest rates were relatively low and stable. The prime rate generally remained in the single digits, reflecting a more regulated financial system and moderate economic growth. Borrowing costs were predictable.
Inflationary Shocks & High Volatility (1970s-Early 1980s)
The 1970s and early 1980s represent the most volatile period in Canadian prime rate history. Soaring inflation, global oil shocks, and monetary tightening pushed the prime rate above 20% in 1981. This period demonstrates how quickly borrowing costs can escalate during sustained inflation.
Disinflation & Monetary Discipline (1990s-2000s)
After the inflationary crisis, the Bank of Canada adopted an inflation-targeting regime in the early 1990s. This approach helped stabilize inflation and interest rates. The prime rate evolved within a more moderate range, highlighting the importance of central bank credibility.
Financial Crises & Emergency Rate Cuts (2008-2017)
The global financial crisis triggered rapid and significant rate cuts, driving the prime rate to historic lows. Further economic shocks, like the mid-2010s oil price collapse, prolonged this period of low rates.
Pandemic, Inflation & Rapid Tightening (2020-2024)
The pandemic saw rates plummet due to stimulus measures. This was followed by one of the fastest tightening cycles in Canadian history as inflation accelerated. The prime rate climbed quickly, demonstrating the sensitivity of variable borrowing costs.
Did you know? The prime rate isn’t a legally mandated rate. Banks can, and sometimes do, adjust their prime rates independently of the Bank of Canada’s overnight rate, though significant divergence is rare.
| Date of Rate Change | Bank of Canada Overnight Rate (%) | Change (%) | Bank Prime Rate |
|---|---|---|---|
| June 2, 2010 | 0.30% | 0.25% | 2.50% |
| July 21, 2010 | 0.55% | 0.25% | 2.75% |
| September 9, 2010 | 0.80% | 0.25% | 3.00% |
| January 28, 2015 | 0.65% | -0.15% | 2.85% |
| July 16, 2015 | 0.50% | -0.15% | 2.70% |
| July 13, 2017 | 0.75% | 0.25% | 2.95% |
| September 7, 2017 | 1.00% | 0.25% | 3.20% |
| January 18, 2018 | 1.25% | 0.25% | 3.45% |
| July 12, 2018 | 1.50% | 0.25% | 3.70% |
| October 25, 2018 | 1.75% | 0.25% | 3.95% |
| March 5, 2020 | 1.25% | -0.50% | 3.45% |
| March 17, 2020 | 0.75% | -0.50% | 2.95% |
| March 30, 2020 | 0.25% | -0.50% | 2.45% |
| March 3, 2022 | 0.50% | 0.25% | 2.70% |
| April 14, 2022 | 1.00% | 0.50% | 3.20% |
| June 2, 2022 | 1.50% | 0.50% | 3.70% |
| July 14, 2022 | 2.50% | 1.00% | 4.70% |
| September 7, 2022 | 3.25% | 0.75% | 5.45% |
| October 26, 2022 | 3.75% | 0.50% | 5.95% |
| December 7, 2022 | 4.25% | 0.50% | 6.45% |
| January 25, 2023 | 4.50% | 0.25% | 6.70% |
| March 8, 2023 | 4.50% | 0.00% | 6.70% |
| April 12, 2023 | 4.50% | 0.00% | 6.70% |
| June 7, 2023 | 4.75% | 0.25% | 6.95% |
| July 12, 2023 | 5.00% | 0.25% | 7.20% |
| September 6, 2023 | 5.00% | 0.00% | 7.20% |
| October 25, 2023 | 5.00% | 0.00% | 7.20% |
| December 6, 2023 | 5.00% | 0.00% | 7.20% |
| January 24, 2024 | 5.00% | 0.00% | 7.20% |
| March 6, 2024 | 5.00% | 0.00% | 7.20% |
| April 10, 2024 | 5.00% | 0.00% | 7.20% |
| June 5, 2024 | 4.75% | -0.25% | 6.95% |
| July 24, 2024 | 4.50% | -0.25% | 6.70% |
| September 4, 2024 | 4.25% | -0.25% | 6.45% |
| October 23, 2024 | 3.75% | -0.50% | 5.95% |
| December 11, 2024 | 3.25% | -0.50% | 5.45% |
| January 29, 2025 | 3.00% | -0.25% | 5.20% |
| March 12, 2025 | 2.75% | -0.25% | 4.95% |
| April 16, 2025 | 2.75% | 0.00% | 4.95% |
| June 4, 2025 | 2.75% | 0.00% | 4.95% |
| July 30, 2025 | 2.75% | 0.00% | 4.95% |
| September 17, 2025 | 2.50% | -0.25% | 4.70% |
| October 29, 2025 | 2.25% | -0.25% | 4.45% |
| December 10, 2025 | 2.25% | 0.00% | 4.45% |
| January 28, 2026 | 2.25% | 0.00% | 4.45% |
What Influences the Canadian Prime Rate?
The most significant factor influencing the Canadian prime rate is the Bank of Canada’s overnight rate. When the Bank raises its overnight rate, it becomes more expensive for banks to borrow money from each other. They then pass this increased cost onto consumers by increasing their prime rate.
Since 2015, the spread between the Bank of Canada’s overnight rate and the prime rate has typically been around 2.20%. While this relationship has remained relatively stable, it isn’t guaranteed. Banks aren’t legally obligated to follow the overnight rate exactly.
Example: If the Bank of Canada’s overnight rate is 2.25%, most banks will set their prime rate around 4.45%, a difference of 2.20%.
For mortgage eligibility, lenders assess borrowers based on gross income and stress-test payments, not net income. Prime rate fluctuations impact long-term affordability, but eligibility is based on criteria in place at the time of approval.
Variable-rate mortgages are directly linked to the prime rate. When you get a variable-rate mortgage, the interest rate is usually expressed as:
Prime Rate ± a Spread (Delta)
Example: Prime Rate – 0.60% = Mortgage Rate
When the prime rate goes up or down, your mortgage rate adjusts accordingly, directly impacting your amortization and the interest portion of each payment.
Variable Mortgages & the Prime Rate
Most lenders offer variable mortgages at a discount to the prime rate (e.g., Prime Rate – 0.25% or Prime Rate – 0.60%). The stronger your credit score and down payment, the better the rate you’ll receive. You might even secure a better discount with a high-ratio mortgage, even with a lower down payment, because it carries less risk for the lender.
Fixed vs. Variable Strategy in a Changing Landscape
Choosing between a fixed and variable mortgage rate depends on two key factors: your outlook on interest rate movements and your risk tolerance.
If you’re unsure, several lenders offer convertible mortgages. This allows you to convert your adjustable-rate or variable-rate mortgage to a fixed rate before maturity, without penalty.
Historical context helps make better decisions. During periods of sharp increases, a fixed rate provides peace of mind. But during pauses or declines in rates (like now), variable rates become more attractive, especially if they offer flexibility with prepayment or reduced penalties. If you plan to renew or refinance, comparing variable and fixed rates can generate significant savings over the term of your mortgage.
- Fixed Rates: Ideal when rates are expected to rise. You lock in a rate and predictable monthly payment for the term of your mortgage.
- Variable Rates: More attractive when rates are falling or remaining stable. They typically start lower than fixed rates, but your payments (ARM) or interest costs (VRM) can fluctuate over time.
Canadian vs. US Prime Rates
The prime rate in the United States currently sits at 7.50%, while in Canada, it’s 4.45%. This difference isn’t just a number; it reflects the different ways the Bank of Canada and the Federal Reserve respond to inflation, growth, and financial stability.
In the US, the Fed sets the Federal Funds Rate, which guides the prime rate applied by banks to their best customers. In Canada, the equivalent is the Bank of Canada’s overnight rate. While both central banks adjust rates to control inflation and support sustainable growth, the timing and magnitude of their decisions often diverge.
Several factors explain why the US prime rate is higher than Canada’s:
- Inflationary pressures have remained stronger in the US, requiring more aggressive rate hikes.
- The US economy’s resilience has allowed the Fed to maintain higher borrowing costs without triggering a recession.
- Monetary dynamics also play a role, as central banks consider exchange rates to protect their economies from imported inflation.
For Canadians, these differences matter. A higher US prime rate can strengthen the US dollar against the Canadian dollar, making imports more expensive and sometimes influencing the Bank of Canada’s own decisions. For borrowers, understanding these cross-border dynamics helps explain why Canadian mortgage rates don’t always follow the same trajectory as those in the US.
Frequently Asked Questions (FAQ)
What is the current prime rate in Canada?
As of January 31, 2026, the prime rate in Canada is 4.45% across major banks.
How often does the prime rate change?
The prime rate changes when the Bank of Canada adjusts its overnight rate, which can happen up to eight times a year. The overnight rate, as of January 31, 2026, is currently 2.25%.
Does the prime rate affect mortgage rates in Canada?
Yes. The prime rate directly influences variable-rate mortgages, HELOCs, and several lines of credit, as their pricing is directly tied to it. Fixed rates, however, are more influenced by bond yields, which are indirectly affected by Bank of Canada decisions.
Do all banks apply the same prime rate?
Generally, all major Canadian banks adjust their prime rate one or two days after a Bank of Canada decision. TD Bank, however, applies a different prime rate for its variable mortgage products.
How should borrowers approach future prime rate changes?
Future Canadian prime rate changes depend on inflation, economic growth, and Bank of Canada decisions. While short-term movements are difficult to predict, borrowers can manage uncertainty by choosing a mortgage structure that aligns with their risk tolerance, income stability, and long-term financial goals. Preparation is key.
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Understanding the prime rate empowers homeowners to make informed mortgage decisions, regardless of future rate movements. The mechanics of the prime rate, lender behavior, and loan structure matter more than short-term forecasts.
If you’re considering a fixed or variable rate, the experts at nesto can help you make an informed decision. We’ll analyze your financial profile, rate outlook, and mortgage horizon to build a personalized, cost-effective plan for the years ahead.
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