Blog  //  Prime Rate - What is the Prime Rate?

17 Mar. Posted by Ryan Crane in Oakville Mortgage Info | 0 comments
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The Prime Lending Rate in Canada is a guideline interest rate charged by banks on loans for their most creditworthy or “best” clients. The actual minimum rate, however, may differ slightly from lender to lender. Banks and lenders in Canada do follow the prime rate in order to remain competitive, but at the same time they may add their own monetary spread to the prime rate. For example, when the prime lending rates were high, many lenders in Canada were offering variable rates at prime minus .90 per cent. If the prime rate is low, lenders could potentially offer variable rates at prime plus a percent. This model of prime rate tracking allows lenders to remain highly competitive while still adhering to the fluctuating interest rate of prime.

Influences on the prime rate

Canada’s prime rate is influenced primarily by Canadian economic conditions. The Bank of Canada adjusts it directly, depending on the state of the economy. The Bank of Canada therefore decides what interest rate prime should be set at and for how long. This is vital to the growth and stability of the country.

Economic ups and downs in a country like Canada directly affect the ability of banks, companies and consumers to spend money or to provide goods and services. These ups and downs are driven by various factors in employment, manufacturing and exports. All of these things, taken together, affect the inflation rate. When inflation is high, the Bank of Canada must act quickly to avoid an overheated economy. In this case, they react by increasing the prime rate, thereby making the act of borrowing money more expensive. This has the effect of cooling off the economy so as to control the rate of inflation. Likewise, in cases where inflation is low, the Bank of Canada will decrease the prime rate, so as to heat up the economy.

The prime rate only changes when the Bank of Canada decides it is necessary to boost the economy or to slow it down. In November of 2000, the Bank of Canada introduced eight fixed dates each year where they would announce any rate changes. Announcements for changes of many other Bank of Canada-influenced rates, such as the overnight rate target, also share the same dates. These dates do not necessarily guarantee any movement of the prime. They are simply dates on the calendar where the prime rate can be changed if required. There have been times over the last decade where the prime rate was not changed at all for long periods of time.

Effects of prime rate on consumers

Canadian consumers and businesses alike cannot always pay cash for all things, therefore they must borrow in order to purchase more costly goods or services. This is where the prime rate is vital to the operation of any household or business. In one way, shape, or form, this interest rate affects almost everyone’s daily life, not just a borrower.

If you're in the market for a particular product built by mass manufacturing, chances are that companies built that product using borrowed funds. These borrowed funds typically come from a bank or lender where the prime rate is used as the most basic and proportionate factor for calculating interest charged on the loan. Even if preparing to purchase a new vehicle, as a consumer, if you choose to finance your vehicle, the dealership's financing department bases their auto loan rates on a calculation using the prime rate.

How the prime lending rate influences the mortgage market in Canada

In the Canadian mortgage market, the prime rate is used for calculating and lending money on variable rate or line of credit mortgages.

A variable rate is typically a closed term, either 3 or 5 years in length. Usually, depending on the economy and availability of mortgage money during a particular cycle, variable rate mortgages will follow prime rate less a set discount. For example: Some variable rates will have a Prime Rate minus 0.80%. Today, the prime rate is set at 3.00% and the best variable rate is 2.20%

A line of credit will typically be based on prime rate plus a percentage or basis point count. A line of credit in Canada is a very popular form of borrowing and regardless of the lender you deal with, they all follow the prime rate lending model so there is very little variance from institution to institution. Regardless of whether it's a variable mortgage or a line of credit, they are both heavily based on and follow the prime rate in Canada. When the prime rate changes, so too can the variable rate or line of credit interest calculation that is used for your loan. Making sure you understand the prime rate and how it is tied to our monetary system and the Canadian economy will make things easier when it comes to deciding what options you choose when borrowing money.

Notable Prime Lending Rate Observations since 1975

Highest Prime Rate observed: 22.75% on Wednesday, August 12th 1981.

Lowest Prime Rate observed: 2.25% on Wednesday, April 22nd 2009.

Current Prime Rate: 3.00% on Wednesday, March 16th, 2011

03/16/2011 –This article posted by Ryan Crane, an Oakville Real Estate agent working throughout the GTA and specializing in the Milton, Mississauga, Burlington, and Oakville Real Estate markets. You will find him at www.OakvilleRealEstate4sale.ca.

This Oakville Real Estate Agents website has tools that provide information on all of the Homes for Sale in Oakville including all the Oakville MLS Listings and Oakville Sold Prices.

Source- Canequity.com

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