Encyclopedia
Prime rate
The rate banks use as a base for variable loans. It tends to follow the Bank of Canada's policy rate.
For example: A borrower's variable rate is prime plus a margin. (Illustration only, not a real deal.)
Official source: Bank of Canada: key interest rates
Example only, not a real client. Say your business line of credit is set at prime plus a margin. When the Bank of Canada raises its policy rate, banks usually raise prime, and your interest cost goes up.
What I’d tell a friend
Know which of your loans float with prime, and test your budget at higher rates.
Why it matters to you
When prime moves, variable-rate payments usually move with it, sometimes within weeks. If your cash flow is tight, a rate rise can turn a good deal into a stressful one, so test your numbers at a higher rate.
How to use it in your deal
Borrowers should check how your loan is priced and how quickly changes apply. Model higher rates to make sure the property still covers its debt. Consider fixing part of the debt if certainty matters. Buyers comparing financing should compare the full cost, including fees. Owners can watch the Bank of Canada schedule of rate announcements to anticipate changes. Lenders may also change margins at renewal.
Tenants indirectly feel rate rises when landlords try to pass costs on through higher renewal rents. Here's a quick test for an owner: take your loan balance, add a couple of points to the current rate, and see whether your property's net income still covers the payments with room to spare. If it doesn't, talk to your lender before the next rate move, not after.
Business owners who use a line of credit at prime to fund tenant improvements or a down payment should remember that's short-term, callable money; it's riskier than a term mortgage for long-term assets.
Mistakes I see
Ignoring rate risk. Confusing prime with the policy rate. Not reading loan pricing. Funding long-term property with a demand line of credit. Forgetting that some lenders' prime rates differ slightly from others.
In BC and Vancouver
The Bank of Canada sets the policy rate; banks set prime. Rate announcements are published on a set schedule.
Official sources: Bank of Canada: key interest rates
What it is
The prime rate is the rate banks set as a base for many variable loans. It usually moves with the Bank of Canada’s policy rate.
Variable commercial loans are often priced as prime plus a margin.
Planning
Check your loan terms for how and when rates change.
Consider whether a fixed rate or a mix suits your risk tolerance, and talk with your lender about options.
Questions to ask before you sign
- How is my loan priced?
- How fast do changes apply?
- What if rates rise?
- Should I fix part of the debt?
Keep reading
Related terms: Bank Rate / policy rate, Yield (5-yr GoC)
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.