DEFINING PRIME RATE
Something you need to know.
When you start talking shop with a lender or a mortgage broker, you’ll hear a lot about the prime rate. People will take about things like prime plus three and prime plus four.
They might even talk about which side of the bed Mark Carney woke up on this morning. We’ll talk about Mr Carney and the Bank of Canada in a future post, but just what is this prime they keep talking about? Sadly, this one is kind of complex.
The prime rate is something determined by banks and lenders, but it is directly affected by the Bank of Canada’s bank rate: the lending rate at which financial institutions can borrow money.That’s right.
Banks and other lenders don’t just have all the cash they need lying around – often they need to borrow funds in order to guarantee the loans that they give to us. It is influenced by the federal government’s responses to both domestic and international financial situations.
In August of 2012, the prime rate at most banks in Canada is 3%. That means the interest on a loan offered to you at a variable rate of prime plus point-three will be calculated at 3.3%. That is, until the Bank of Canada changes the bank rate. If it goes up by a quarter of a percentage point (to 3.25%), then your variable rate loan also goes up by the same amount — to 3.55%.
Low rates inspire more borrowing, which in theory means more spending and a more robust economy. The recent financial crises in Asia, the United States and Europe have kept Canadian rates low for quite some time now.
Take note, true believers, the rates will go up at some point. You should definitely speak with a mortgage broker about ways to take advantage of low rates now while preparing for future changes.
In future blog posts, we will talk about interest (the amount of your payment that goes to the mortgage), principal (the amount of your payment that goes toward the house) and more ten-dollar words, like lien.