A Brief Introduction to the Prime Rate History Canada
Before we talk about prime rate history Canada, it’s pertinent to understand what prime rates in Canada are and what is their significance.
What Is “Prime Rate”?
Prime Rate is the rate at which banks lend to their most preferred customers. These most preferred customers are certainly not the general public. They are generally large corporations who have a very good financial position and credit standing at that particular point in time.
The Bank Charges Interest To Compensate It For Two Factors.
- Firstly the bank loses an opportunity since the money is passed on to the customer. If the loan was not made, funds could have been utilized alternatively and gains made.
- Secondly the bank may risk default by passing it funds to the borrower who may never be able to pay back.
So a Prime rate is given to the customer who has the minimum probability of default. In Canada the Prime Rates are set by the Bank of Canada and are revised on a weekly basis.
How Does It Affect Me?
The prime rate sets the basis for many types of loans. All variable mortgages are expressed as percentage points above or below the prime rate. Hence if the prime rate changes, so will the interest rates on your mortgage payments. In case the interest rates change, so does the payment. So it directly affects the amount of money that flows out of your pocket in case you have an adjustable rate mortgage. A study of prime rate history Canada would show you how it has affected other people in the past.
What Factors Determine Canada Prime Rate?
Prime rates in Canada are determined by the Bank of Canada. They are influenced by factors such as the overall state of the economy, the money supply in the nation and the availability of credit. For instance if inflation is going out of control, Bank of Canada can decide to increase the interest rates, this will make the borrowing more expensive. As a result, less people will borrow and spend and hence inflation will be controlled. A good look at the prime rate history Canada may help.
Can Canada Prime Rates Be Predicted?
Anyone who claims they can predict the movement of prime rates is most certainly not saying the truth. If they could predict the movements precisely they would be some of the wealthiest people on earth.
However it is possible to get a rough idea of where these interest rates are heading if we have a look at their history.
How And What To Look For In Prime Rate History Canada?
In case you go to a website and just pullout the numbers at different points in time, they would make little sense. A person would not be able to understand why the numbers went up or down. It would look like the results of roulette. They need to be looked at, in context of the economy and compared with a number of factors called the economic indicators. It is a very complex procedure and is best left to economists.
Understanding Prime Rate History Canada For Mortgages
In case you are considering taking out a mortgage, but do not know whether to choose a fixed rate or a variable rate, a look at the prime rate history Canada will help. Fixed rates have their own benefits. They are easier to budget with since your payments would remain the same for the term agreed upon. The three most common durations for locking in interest rates are 1, 3 and 5 years.
Variable rate mortgages are more difficult to consider. A good understanding of the prime rate history Canada is required. Variable rate mortgages are generally expressed as prime rate plus or minus a certain percentage. For instance if your variable rate mortgage is prime rate plus 0.5% then you would have to pay interest at the rate of 2.75% considering the prime rate of 2.25% prevailing now.
These rates would remain fixed only till the prime rate remains the same. If the prime rates change to 3.5%, you may have to pay 4% for the amount of time, the rate stays at 4%. The general range of variable rates has been prime rate plus or minus 0.8%.
A remarkable change in trend was seen in 2008. Prior to 2008 all rates were prime rate minus a certain percentage. But as the credit crisis took over USA, it affected the Canadian economy to some extent as well, and as a result there was a complete turnaround and interest rates were expressed as percentage additions to the prime rate.
As we are aware by now, prime rates are almost impossible to predict. They change as the overall health of the economy changes. The overall health of the economy is as unpredictable as it can get. Or else why would we ever have recessions? They are when things go out of control.
Hence it would be advisable for people in later stages of their life to take fixed mortgages. They would know what their payments are going to be and whether they can afford them. It would be prevent them from getting unpleasant surprises, when all of a sudden their mortgage payments may have gone through the roof.
For younger people or anyone who can take more risks a variable rate would still not be advisable. Just because you can take risks does not mean that you should. It is advisable to have good knowledge of where the financial markets are going to move, along with a strong knowledge of prime rate history Canada.
You may not necessarily have all the knowledge yourself. If some trusted advisor like a mortgage broker has the knowledge they can advice you as well. But be sure that you are talking to a genuine person. Check their credentials. See if they have any experience in this field or are they just reading it out to you from a magazine which could be a press release made by some mortgage lender. Also try to carefully understand the argument they are making with regards to the variable rate being better. Pay careful attention to the assumptions they make in these arguments. If the assumptions are faulty so will be the conclusion.
However if you feel confident about being able to predict the prime rate movement go ahead and take a variable rate loan. But please try and understand that the resultant payments may lead to unpleasant surprises. It seems like it will not make a big difference if interest rates rise from 2.25% to 3.5% but it may severely impact your mortgage payments. So much so, that the rise may be close to an increase of one third over the previous amount.