TL;DR: the Bank of Canada sets a rate, and banks and financial institutions in Canada use that rate to set their Prime lending rate. It's usually the same at most banks/institutions but not always. As Prime goes up or down, so do the rates (and often monthly payments) associated with debt whose interest rate is pegged to Prime, like mortgages and many personal and car loans. If the loan itself is a variable rate loan, the rate on that loan goes up. If your loan is fixed, it will not - but the rates on any new loans will take the change in Prime rate into account.

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The prime rate is the interest rate that financial institutions in Canada use when they set their rates for loans, such as mortgages. It is currently at 3.95 percent. The prime rate or prime lending rate depends on the policy interest rate that the Bank of Canada defines. 

What is the prime rate?

The prime rate is central to all interest rates charged by financial institutions. Any loans offered by financial institutions will be based on this rate. That includes credit lines, car loans, mortgages and more. That is why when the prime rate fluctuates, so does the rate of interest paid by borrowers.

Setting the prime rate

The prime rate is influenced largely by the policy interest rate that the Bank of Canada sets. This is also called the BoC’s target for the overnight rate. So, when the overnight rate increases, it costs more for financial institutions like banks to borrow money. They, in turn, increase their rates to make up the extra cost. Similarly, when the overnight rate is dropped by the Bank of Canada, financial institutions can drop their rates. 

Prime rate and mortgages

In Canada, home buyers have two mortgage rate options: fixed or variable. A fixed mortgage rate is one that does not change for the term. This rate will not be changed or altered regardless of what the Bank of Canada decides. This is a good mortgage for those concerned about rising interest rates or those looking for stability in their mortgage payments. 

A variable mortgage rate is noted in a mortgage agreement as the prime rate +/- a certain percent. This means that when the prime rate changes, the mortgage rate will also go up or down based on the details in the mortgage agreement. Home buyers are often attracted to the lower rate of a variable mortgage, but it is important to remember that rate can change throughout the term. Borrowers can sometimes switch their variable rate mortgages to fixed rate ones. This locks in the fixed rate at the time of the switch.

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