Canada’s Household Borrowing Rate Is Dropping 4x Faster Than During The Great Recession

Canada is trying to exit a tough situation with the only trick it knows – cheap money. Bank of Canada (BoC) data shows the effective interest rate paid by households plummeted for the week of April 10, 2020. The rate paid by households is now the lowest it’s been in years, accompanied by one of the fastest drop to rates in a generation.

Household Effective Interest Rate

The household effective interest rate is an index of interest paid by households. It includes both mortgage and consumer debt, at the posted and discount rate. It helps us understand what the actual interest being paid looks like. This is opposed to using a 5-year fixed benchmark, that no one is paying.

Despite what you’ve heard from people selling debt products, cheaper money is bad news. During periods where the economy is struggling, borrowing rates are slashed. This is an incentive to try and get people to borrow. By using more debt, we’re using future productivity to prop up growth today. To contrast, rates rise during periods of rapid economic growth. As in the economy is doing so well, we actually need to cool the amount of future income borrowed.

Household Interest Dropped By Nearly A Fifth

The effective interest rate paid by households has been dropping very quickly. The rate fell to 3.13% on April 10, down 9.79% from a month before. This brings the rate a massive 19.74% lower than the same week last year. If that seems like a quick drop, that’s because it is. This kind of drop has only historically been seen before a global financial crisis.

Canadian Household Effective Interest Rate

The Bank of Canada’s weekly effective borrowing rate for Canadian households. The number is a weighted average of interest rates on mortgage and consumer credit products.

Source: Bank of Canada, Better Dwelling.

Effective interest rates dropped to the lowest level in years, and made one of the biggest drops ever. The rate on the week of April 10th is the lowest level for Canada since July 2017. The decline itself is noteworthy as well. It’s almost 4x larger than the same week during the Great Recession. That makes it one of the fastest declines ever

Canadian Household Borrowing Rate Change

The 12 month percent change for the effective interest rate households paid on April 10.

Source: Bank of Canada, Better Dwelling.

Interest rates have been rapidly falling, and so has the cost of borrowing. However, with job losses piling up, this is more likely intended to be a lifesaver, than a boost to the economy. Unless households in the OECD’s most indebted country can double its debt again.

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4 Comments

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  • Mica 4 years ago

    Cheap money = inflation. Watch CPI. If it drops ex gasoline, you know there’s real issues brewing that won’t pass as easily as everyone thinks it will.

  • LT 4 years ago

    “Unlike the Chinese economy, which is much more dependent on manufacturing and exports, the North American economy relies heavily on domestic consumers and business services. It’s one thing to get back to work, quite another to get businesses and consumers spending again.”

    https://www.theglobeandmail.com/investing/markets/inside-the-market/article-a-60-cent-loonie-and-painful-days-for-banks-and-home-owners/

    More stimulus is coming. And it’s going to kill people that earn a living through wages.

  • straw walker 4 years ago

    What’s next;
    I lived through a few of these in Calgary
    Lease trucks and foreclosed vehicles
    In past economic hard times in Calgary auto dealers had tons of vehicles returned and you needed was $39 bucks and you could take over any lease vehicle..
    Boats are the 1st to go, then travel trailers and motor-homes..
    Then all those $80,000 jacked up trucks.

    • Brad 4 years ago

      That’s because Alberta is a one trick pony that completely relies on oil, so when times get tough they’re bad for everyone. Other provinces are diversified which is why even through tough times they don’t completely sell off like Alberta does.

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