The prime rate is the interest rate that major banks and financial institutions use as a benchmark for lending. It serves as the base rate for many types of loans, including variable-rate mortgages, lines of credit, and business loans.
How It’s Set
In Canada, the prime rate is influenced by the Bank of Canada’s policy interest rate. When the central bank raises or lowers its rate, commercial banks usually adjust their prime rate accordingly.
Why It Matters
- For borrowers: Variable-rate loans and lines of credit are directly tied to the prime rate.
- For lenders: It provides a standard reference for setting loan pricing.
Final Thoughts
The prime rate is a key driver of borrowing costs. Understanding how it works helps borrowers anticipate changes in loan payments, especially for variable-rate mortgages and credit products.