If you choose a variable-rate mortgage, your First National mortgage loan rates will change along with the prime rate, also called the prime lending rate. The exact formula will be detailed in your mortgage contract. Knowing what the prime rate is and where it comes from is important to understanding what will influence your mortgage interest rates during the course of your mortgage term.
The prime lending rate is the best interest rate a lender offers to its borrowers. In other words, it’s the interest rate the most creditworthy (or “prime”) borrowers receive on their loans. So, logically, First National’s prime mortgage rates are the lowest interest rates available on mortgages to First National’s most qualified homebuyers.
Each financial institution sets its own prime rate that serves as a baseline for interest rates on all of its variable-rate loans. Like all lenders, First National bases its prime rate largely on a target overnight rate set by the Bank of Canada.
Major financial institutions in Canada lend and borrow money from each other overnight. The rate they typically charge each other for these loans is called the overnight rate. The Bank of Canada, Canada’s central bank, uses monetary policy to influence the overnight rate to try to steer the economy toward a balanced inflation rate. To do this, the Bank of Canada sets a target overnight rate, sometimes called the policy interest rate.
Lenders typically update their prime rates after the Bank of Canada adjusts its target overnight rate. This impacts the interest rates borrowers can get on many types of loans. The Bank of Canada sets its policy interest rates according to national and global economic trends.
The main thing to keep in mind is that if you opt for a variable-rate mortgage, your interest rates will vary in line with your lender’s prime rate, which is heavily influenced by larger economic trends and actions of the Bank of Canada. This will impact how much of your mortgage payment goes toward principal and interest each month, and how long it takes you to pay off your mortgage loan.
In periods of stronger economic growth, interest rates tend to be higher, as more people look to borrow money to make major purchases or start or expand businesses. In periods when the economy is weaker, interest rates tend to be lower.