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Prime Lending Rate vs. Fixed Mortgage Rates

Canadians frequently ask us whether an increase or decrease in the prime rate causes fixed mortgage rates to move. This question is best answered by describing the differences between the prime rate and fixed mortgage rates:

Prime Lending Rate

For most Canadians, the prime lending rate is what major banks offer us for a secured line of credit or a variable rate mortgage. When the Bank of Canada lowers or increases the overnight target rate (the rate banks use to lend each other money) most lending institutions will follow by adjusting their prime rate (the rates banks are willing to give their best clients) accordingly. Most major banks and lenders in Canada will almost always follow this rate change, but this is just a target rate. Banks and lenders can and may choose not follow the rate adjustment. In most cases, the Bank of Canada overnight rate is much lower than the prime rate major banks will offer to their clients. Canadians should not ever expect to borrow at the overnight rate unless they are a bank.

Fixed Mortgage Rates

Fixed mortgage rates are locked in for a designated amount of time. There are fixed terms starting from 6 months to 25 years, with the 5 year term being the most popular. Funds for these products come from various sources. The majority being from trust company investment portfolios, term deposits, bonds, life insurance funds, pension and other investment funds. You can usually gauge an increase or decrease in fixed mortgage rates if you follow the Bond Market. Fluctuation in fixed mortgage rates has little or nothing to do with the Prime Lending Rate.

The Prime Lending Rate and Fixed Mortgage Rates have very little to do with each other. It is important to remember that changes in the Prime Lending Rate are usually indicative of the general state of the economy. Bond rates and fixed mortgages usually fluctuate with the market and with activity or interest generated by investors.

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