Prime rate
The prime rate is the reference rate a financial institution uses as the base for the variable interest rate on its loans. Each institution sets its own prime rate, and a variable loan is priced as that rate plus or minus a margin.
A buyer comparing variable-rate loan offers may see rates expressed relative to prime. BDC describes the prime rate as the reference rate financial institutions use to determine the variable interest rate they offer on loans to businesses and individuals. The Bank of Canada notes that each institution sets its own prime rate, as a function of its cost of funding, which is influenced by the target for the overnight rate that the Bank sets.
How the loan rate is built
BDC gives the formula as variable rate equals prime rate plus or minus the bank margin. It says the lender sets the margin by looking at the customer’s profile, credit file and risk rating, and that the prime rate may change each time the Bank of Canada changes its policy rate. The fixed vs variable rate entry shows how this affects a loan’s cost.
What to ask
- Which prime rate does the loan refer to, and who publishes it?
- What margin applies, and can the lender change it during the term?
- How soon does a change in prime show up in the payment?
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentPrime interest rate
- 02Bank of CanadaResearch dataInterest rates posted for selected products by the major chartered banks
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