What is the prime interest rate?

The prime interest rate (or simply “prime”) is the rate banks and credit unions charge for loans to their most creditworthy borrowers. Prime generally moves in sync with the Bank of Canada’s policy interest rate.

Financial institutions base their rates for lending products on prime. For example, the interest rate for a loan, line of credit or mortgage may be expressed as “prime plus” or “prime minus” a certain percentage. Interest rates are usually different for “fixed rate” and “variable rate” products.

How rate increases impact fixed and variable rate products differently

Fixed rate products

If you have a fixed rate product, such as a fixed rate mortgage or loan, you pay a set interest rate for the duration of your term. Changes in prime don’t affect your payments and you’ll continue paying the same rate of interest for the term of the mortgage or loan. However, when your mortgage comes up for renewal or you take out a new loan, you’ll be offered whatever the new fixed rate is at that time.

Variable rate products

If you have a variable rate product, such as a variable rate mortgage or line of credit, your interest rate is tied to prime. That means when prime goes up or down, your interest rate does too.

With mortgages, this generally won’t impact the amount you have to pay each month if you have blended payments, but the amount of your payment that goes toward paying down your principal amount and interest owing will fluctuate.

Rising interest rates may mean that the amount that’s going toward paying down your variable rate mortgage is decreasing. If this is the case, at the end of your mortgage term you’ll have a larger residual balance and your new payment will increase. For lines of credit, your monthly payments will fluctuate as the prime rate moves.

For both variable rate mortgages and lines of credit, if the prime rate continues to rise and the interest amount exceeds your payment amount, your payment will be adjusted.

How prime impacts your mortgage or line of credit

Learn more about how rising rates affect variable rate mortgages or lines of credit and book an in-person or virtual appointment with a Prospera advisor to develop a personalized plan to manage rising interest rates.

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