When most people purchase a home, often the first question they ask is, “How much will my monthly mortgage payments be?” Mortgage rates are calculated based on a number of different factors, including the amount of your loan, length of loan, and the overall interest rate. One of the most important figures in determining your monthly mortgage payments is the prime rate.
Prime Rate Explained
The Canada Prime Rate is the lowest and best interest rate a borrower will offer a lender at any given time. These rates are given to borrowers who have excellent credit scores and are used as a baseline in determining your overall rates depending on your own credit history. You may have seen advertisements claiming interest rates on homes and cars “as low as 3%” or another similar number. These advertised rates are frequently prime rates.
The prime rate is calculated by the Bank of Canada and adjusted occasionally depending on the state of the economy. In times where the economy struggles and inflation is low, the prime rate is typically lower in order to encourage spending and boost the economy. In Canada, there are eight days per year that the Bank of Canada can announce prime rate changes if necessary. Keep in mind, however, that this doesn’t mean the prime rate will change on each of these dates.
Prime Rate’s Effect on Mortgage Payments
The prime rate also has a drastic effect on mortgage payments. While your Calgary mortgage broker can tell you exactly what your rate will be, the baseline rate in determining it will be the prime rate. For example, if the current prime rate in Canada is 3%, you know that your loan’s interest rate will most likely not be lower than 3%.
Quite simply, the higher the prime rate, the higher your mortgage payment will be. The highest prime rate in Canada was 22.75% in August, 1981. Compared to the March 2011 prime rate of 3%, your mortgage payments would still likely be smaller if you were to purchase a home today than 30 years ago at that record high.
When the bank calculates the interest rate on your loan, it will use the prime rate as a starting point and then determine, based on your credit and other factors, how far over the prime it will be. Often, a bank will refer to your loan rate as Prime plus the difference; for example, “Prime plus 1%” would mean your interest rate would be 4%.
The Canada Prime Rate is the starting point for determining mortgage rates and will have a large impact on your monthly mortgage payment. You can keep your payments and interest rate as low as possible by improving your credit score or maintaining your score if it is already excellent.
