The prime rate is an interest rate the bank sets, usually in alliance with the Bank of Canada’s prime rate, as a reference source for variable rate mortgage or home equity line of credits.
When in a variable rate mortgage or with a home equity line of credit, if the bank’s prime rate goes up to down, the variable interest rate or HELOC interest rate does as well.
Variable rates are usually discounted from the prime rate. For example, if a lender is offering a variable rate of prime minus 1%, and prime is set at 3.2%, then the borrower’s effective variable rate is 2.2%. If the prime rate increases to 3.4%, then the variable rate of prime minus 1% becomes 3.4%.