How the prime rate works — and who actually sets it
The prime rate is the base interest rate that Canadian financial institutions use to price variable-rate loans, including mortgages, lines of credit, and some business loans. Despite being called 'the' prime rate, each lender sets its own — but in practice, Canada's Big Six banks (RBC, TD, Scotiabank, BMO, CIBC, and National Bank) move their prime rates together and in lockstep with the Bank of Canada's overnight rate.
When the Bank of Canada changes its overnight rate by 0.25%, the prime rate moves by the same amount — typically within hours of the announcement. The gap between the overnight rate and the prime rate is not fixed. Historically, prime has been approximately 2.00% to 2.20% above the overnight rate. As of early 2026, with the overnight rate at 3.25%, major lender prime rates sit at approximately 5.45%.
The Bank of Canada sets the overnight rate eight times per year on pre-announced dates. Variable-rate borrowers should mark these dates on their calendar — they are the only scheduled events that can change their mortgage payment. Between announcements, the overnight rate does not change.
Variable-rate discounts — how prime minus 0.80% becomes your rate
No borrower pays the prime rate directly. Variable-rate mortgages are priced as prime minus a discount — for example, prime minus 0.90% — which produces your effective contract rate. If prime is 5.45% and your discount is 0.90%, your mortgage rate is 4.55%. This rate adjusts up or down when prime changes, but your discount stays fixed for the term.
The size of your discount depends on the same factors that affect fixed rates: insured vs uninsured status, credit score, debt ratios, property type, and lender appetite. An insured mortgage with strong credit might secure prime minus 1.20% (4.25% effective rate at current prime). An uninsured rental property might only get prime minus 0.30% (5.15% effective). The 0.90% spread between these scenarios is the risk premium.
Past rate performance does not establish the cheaper option for a future term. Compare your starting offers, possible rate changes and the cost of breaking the mortgage.
- Insured (<20% down): typically prime minus 0.90% to 1.20%
- Insurable (20%+ down): typically prime minus 0.60% to 0.90%
- Uninsurable (rental, >$1M): typically prime minus 0.30% to 0.60%
- Your discount stays fixed for the term — only prime moves
Adjustable-rate vs variable-rate with fixed payments — the critical distinction
There are two types of variable-rate mortgages in Canada, and they behave very differently when rates change. An adjustable-rate mortgage (ARM) changes your payment amount every time the prime rate changes — if prime rises by 0.25%, your monthly payment increases immediately to maintain the same amortization schedule.
A variable-rate mortgage with fixed payments keeps your payment the same when prime changes. Instead of paying more, more of your payment goes to interest and less to principal — which extends your amortization. If rates rise far enough, you can hit the trigger rate (see next section), where your payment no longer covers even the interest.
Most Canadian variable-rate mortgages are the adjustable-rate type that changes payments with prime. But some lenders offer the fixed-payment variant, particularly credit unions and monoline lenders. Before signing, confirm which type you are getting — the risk profiles are very different. A fixed-payment variable mortgage in a rising rate environment can silently extend your amortization to 40, 50, or even 70 years without you noticing until the trigger rate alert arrives.
Trigger rate explained — when your payment stops covering interest
A trigger rate is the mortgage rate at which your monthly payment covers only the interest — with zero dollars going to principal. When the Bank of Canada raises rates enough that your variable rate crosses this threshold, your lender will contact you with options: increase your payment, make a lump-sum payment to reduce the balance, convert to a fixed-rate mortgage, or extend your amortization.
Trigger rates became a national conversation in 2022-2023 when the Bank of Canada raised rates rapidly. Many borrowers who took variable-rate mortgages with fixed payments at 1.50% in 2021 discovered their trigger rate was around 4.00% — and watched rates blow past it. Their amortizations silently extended to 60+ years, and lenders sent trigger rate notices requiring action.
You can calculate your own trigger rate: divide your monthly payment by your outstanding mortgage balance, multiply by 12, and multiply by 100. If your payment is $2,500 and your balance is $500,000, your trigger rate is ($2,500 × 12 / $500,000) × 100 = 6.00%. When your variable rate reaches 6.00%, your payment covers only interest.
- Trigger rate = (monthly payment × 12 / mortgage balance) × 100
- Example: $2,500 payment, $500K balance → trigger at 6.00%
- When triggered: lender requires payment increase, lump sum, or conversion to fixed
- Adjustable-rate mortgages generally do not have trigger rates — payments adjust automatically
- Fixed-payment variable mortgages are the ones at risk of hitting trigger rates
Planning for rate changes — how to stress-proof your variable mortgage
Past rate performance does not establish the cheaper option for a future term. Compare your starting offers, possible rate changes and the cost of breaking the mortgage.
The most resilient approach to a variable-rate mortgage is to stress-test your budget at a rate 2% to 3% above your starting rate. If your variable rate starts at 4.55% (prime minus 0.90%), model your budget at 6.55% to 7.55%. If the numbers still work — or you have the savings to bridge the gap — variable may make sense for you. If a 2% increase would cause financial strain, consider a fixed rate or a smaller mortgage.
Some borrowers use a split approach: put a portion of the mortgage in fixed for certainty and a portion in variable to capture potential rate decreases. This is not available from all lenders but can be an effective hedge when you are uncertain about the rate path.
Canadian prime rate history — what the last 25 years tells us
Past rate performance does not establish the cheaper option for a future term. Compare your starting offers, possible rate changes and the cost of breaking the mortgage.
Past rate performance does not establish the cheaper option for a future term. Compare your starting offers, possible rate changes and the cost of breaking the mortgage.
Variable-rate borrowers in early 2026 are in a different position than those in 2021. With prime at 5.45%, future rate moves are more likely to be cuts than hikes — though the timing and magnitude are uncertain. The Bank of Canada's own forecasts and market pricing suggest gradual easing through 2026-2027, which would reduce variable-rate payments over time.