Prime Rate in Canada — What It Is and How It Moves Your Mortgage

Each Canadian lender sets its own prime rate, but in practice the Big Six banks — RBC, TD, Scotiabank, BMO, CIBC and National Bank — move together within hours of a Bank of Canada policy decision. The overnight rate is the wholesale cost of very short-term borrowing between banks, and prime is essentially that wholesale cost plus a spread that has hovered around 2.2 percentage points for more than a decade.

That is why the phrase "prime follows the Bank of Canada" is only partly true. Lenders can, in theory, hold prime steady when the Bank cuts, or raise it independently. It has happened before — in 2015 the banks passed on only 15 basis points of a 25 basis-point cut — but it is rare, because the first lender to move sets a competitive floor for the rest.

Variable mortgages in Canada are quoted as "prime minus a discount" — for example prime minus 0.90%. When prime moves, your contract rate moves with it on the next payment cycle. On an adjustable-rate mortgage the payment itself changes; on a variable-rate mortgage with fixed payments, the payment stays the same but the split between interest and principal shifts.

A quick way to feel the impact: on a $500,000 mortgage amortised over 25 years, every 0.25% change in prime is worth roughly $70 per month in interest. That number scales linearly, so a 1.00% swing over a year moves the monthly cost by close to $280 for the same loan.

Fixed mortgage rates in Canada are priced off of Government of Canada bond yields, not off of prime. Bond markets react to inflation expectations, U.S. Treasury movements and global risk sentiment, so it is common to see fixed rates drift down while prime is still elevated, or vice versa. Comparing today's 5-year fixed against prime minus a typical discount is the fastest way to see which side of the market has the current advantage.

Ask for the discount, not just the rate. A lender advertising "5.20% variable" against a 6.45% prime is offering prime minus 1.25 — a spread that will follow you for the entire term even if prime keeps moving. Two lenders can quote the same rate today but leave you paying very different rates in eighteen months.

Run the payment at prime, at prime plus 1% and at prime plus 2% before you sign. The stress test that federally regulated lenders apply already forces you to qualify at a higher rate, but running the numbers yourself makes the range concrete and helps you decide whether a variable is worth the volatility for your household.