Prime Rates in Canada
The prime rate is also known as the interest rate which financial institutions and banks use as a benchmark for their variable-rate products. Examples of financial products which depend on the prime rate are: Variable-rate mortgage contracts. Certificate of Deposit (CD) plans also depend on the prime rate. In addition, interest rates on money market accounts and certain interest bearing investments are based on the prime rate.
A prime rate affects the amount of interest earned by saving and investing money. The rate may go up and down over time depending on various economic factors. These factors include: current interest rates, inflation, economic conditions throughout the world and many other factors affecting the overall economy. In order to keep track of changes in the mortgage rate, banks use special formulae to determine the prime rate.
In most cases the prime rate affects variable-rate mortgages, the types of mortgage contracts that feature a markup on the interest rates for borrowers. In addition, it affects loans with balloon payments and interest only mortgages. Typically, a borrower has a two-year term when obtaining a fixed-rate mortgage from a bank or other lender. If the current prime rate is higher than the corresponding current prime rate, then the lender will charge the borrower a higher interest rate, and if the current prime rate is lower than the corresponding current prime rate, then the lender will charge a lower interest rate. However, this markup on interest rates only occurs when the prime rate exceeds two points in difference.
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The prime rate in Canada varies according to three factors: Bank of Canada, the Retail segment and the Consumer segment. When the Bank of Canada increases its base rate, this will significantly affect mortgage rates in the rest of the country. Conversely, when the Retail segment decreases its base rate, this will also impact the costs of financing a mortgage in most regions of the country. Finally, when the Consumer segment, which includes mortgage buyers and mortgage sellers, increases or decreases their interest rates, the effects will ripple through the mortgage industry. The prime rate in Canada thus largely depends on these three factors, namely, Bank of Canada, retail segment, and interest rates among other factors.
As mentioned above, the prime rate in Canada ranges from 2.1 percent to 2.45 percent. This is the main bank rate used by most mortgage lenders in the country. In addition to the Bank of Canada, there are several other large banks including Canadian Imperial Bank of Commerce, CIBC, Scotiabank and National Bank. Although all of these banks do business in Canada, they operate in different provinces and have slightly varying interest rates and mortgage rates. Here are some prime lending rates offered in Canada by the major banks:
As you can see from this short primer, Canadians have a diverse understanding of the prime rate in Canada. Although the two are often confused with one another, the prime rate is a far cry from variable-rate mortgages and does not reflect the sensitive nature of the term “prices”. It is a highly respected interest rate set by the Bank of Canada, however, since it represents the lowest cost of borrowing for most mortgage lenders in the country. For more information about this and other important issues pertaining to variable-rate mortgages, please feel free to access our website.