Demystifying the economy | Prime and key rate, why such a big gap?

Every Saturday, one of our journalists answers, along with experts, one of your questions on the economy, finances, markets, etc.

Very interesting question. Let's first present the facts: what is the usual gap between the prime rates offered by financial institutions, as compiled by the Bank of Canada, and the key rate? Here is a first table which describes the evolution of the two rates since 2000.

Obviously, the two rates follow each other quite closely. Here is the evolution of the gap in percentage points, still since 2000.

On average, as we can see, the gap over the past 24 years has been around 2 percentage points, not 1 point. On six occasions, four times in 2020 and twice in 2024, he has reached a high of 2.7 points. The smallest gap, 1.2 points, was recorded on July 13, 2022.

Now that the statistics have been looked at, let's ask the real question: what do these rates mean for ordinary people?

The key rate, established by the Bank of Canada 8 times a year, is the interest rate that banks and credit unions charge each other to balance their accounts at the end of the day. These are the least risky loans, “practically cash”, summarized in February 2024 in The Press Jean Boivin, former deputy governor of the Bank of Canada¹.

This policy rate is currently in its most frequently cited lower range of 3.25%. Any financial institution that wants to make a profit must lend at a higher rate.

A simple “marker”

Now, what is the prime rate? Contrary to what its name suggests, it is not necessarily the rate that financial institutions grant to their best customers. “The prime interest rate serves as a reference for financial institutions when they set the variable interest rate for the loans they offer,” explains Jean-Benoit Turcotti, spokesperson for Desjardins Group. Financial institutions are free to define their own prime rate, “but they tend to set it at the same level,” he explains.

The prime rate does not dictate the interest rate that a client will obtain for a personal loan or a mortgage, recalls Jean-Michel Klinkow, vice-president mortgage specialist at the Bank of Montreal (BMO). “The important thing is that we must understand that it remains a benchmark. We really need to talk about the final rate that the customer will have. »

It is obviously this “final rate”, and not the prime rate, which will dictate the amount of loan repayments or the penalty for modifying a loan before term.

For example, at the time of writing, Desjardins and the Bank of Montreal had a prime rate of 5.45%. For mortgage loans, the offers displayed by Desjardins include, for example, a closed loan at a fixed rate over 4 or 5 years of 4.69%, as well as an open loan at a variable rate with a two-year term for 6.70%. At BMO, the rates displayed range from 4.59% for a 5-year fixed rate mortgage to 7.15% for a three-year open variable rate.

Rather intriguingly new, the interest rates for variable rate loans are generally higher than for fixed rates. Canadians were used to the contrary.

“It’s my 14^e year with BMO, and this is what we have seen for the past two years,” notes Mr. Klinkow. He is cautious when asked for explanations. Is it simply a matter of supply and demand, with variable rates being more popular when interest rates are expected to fall?

“I leave it to our internal economists and our pricing specialists to explain it,” he replies. Is your guess possible? Absolutely. What I like to remind clients is to concentrate, prepare, go to a bank and negotiate according to their situation. It's surprising, from one bank to another, from one customer to another, you can end up with a quite different rate. »

1. Read “Why Do Mortgages Follow the Prime Rate?” »

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