Canadian Borrowing Rates Are Officially Below Last Year’s Levels

Canadian lenders are scrambling to reboot slowing credit growth, by lowering rates. Bank of Canada (BoC) numbers show the household effective interest rate made a decline on July 26. Rates are sinking this year, recently making the first 12-month decline in 2 years. Even though rates are lower, they are still higher than they were during the real estate price boom – 3 years ago.

Household Effective Interest Rate

The effective interest rate is a weighted-average of interest paid by households. The number includes consumer and mortgage rates, at the posted and discount rates. Lenders provide the information directly, helping to reduce generalizations like posted rates. It’s useful for both determining what people actually pay, as well as the direction of rates. That is, sometimes posted rates fail to reflect loosening or tightening credit conditions. Those changes show up in the effective interest rate index.

Borrowing Rates Fall For First Time Since In Over 2 Years

The effective borrowing rate is dropping – fast. The rate fell to 3.75% the week of July 26, dropping 0.27% from a month before. Compared to the same week last year, this represents a decline of 0.79%. The rate is now the lowest it’s been since July 6, 2018. The rate has been sliding since peaking in early March 2019.

Canadian Household Borrowing 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.

This is the first 12-month decline in 2 years, but the effective rate is still much higher. During this week in 2017, rates increased 7.31% from the year before. Then in 2018, they climbed another 17.03% from the year before. This year the rate finally made a year-over-year decline, but it was just 0.79% from last year. The interest rate is still 24.58% higher than it was in 2016.

Canadian Household Borrowing Rate Change

The 12 month percent change for the effective interest rate households faced on Jun 14.

Source: Bank of Canada, Better Dwelling.

Credit Expands, But It’s Still Tighter Than 2016

If the change is too abstract, let’s do some mortgage math to help illustrate the impact. At the end of July, a borrower earning the same amount could carry ~14.6% more than they could at the recent peak in March. Even with the big ease, that same borrower qualifies for 7.66% less than they would have with the same income in 2016. Rates are higher today than a few years ago, but they seem to be heading lower as of right now.

Borrowing rates are higher than 3 years ago, but are falling very quickly. This is the first month we’ve seen year-over-year declines since 2017. The trend is moving in the direction of lower rates, already dropping 7% from the 2019 high hit in March.

Over half of GDP growth is already coming from construction and real estate. It’s hard to imagine borrowing could stimulate further reliance on real estate. However, it’s also hard to imagine an advanced economy with household debt levels this high.

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  • Kathleen Thomson 5 years ago

    Ironically, the Americans, with their super low 30 year fixed rates, are already saying lower rates won’t fix anything the US. Market’s distorted beyond belief.

    • Trader Jim 5 years ago

      The BOC is providing rate insurance basically. Any time it rises, they inject a few hundred million. Rates peak in March, they drop $250 million on CMBs on a “non-competitive basis.” Yeah, I’m sure that didn’t set off the reversal in direction. *eye roll*

      The strategy is to continue to provide speculators (with multiple homes) liquidity through a lot of first-time buyers. First-time buyers can afford to lose money, they only have one home and poor people tend to pay their bills (as demonstrated in the US financial crisis). Speculators declare bankruptcies, and the lenders lose out that way. Always better to support the lender than the borrower, in the eyes of the government. You’re replaceable. Your bank? Not so much.

      • Big Jim 5 years ago

        -Credit has been tightening recently, with rates slowly rising.
        -Housing markets start slowing as a result.
        -Then BOC suddenly scoops up 1/4billion of Canada mortgage bonds.
        -This provides liquidity to big banks.
        -Banks start lending new money at reduced rates (CMHC insures loans)

        sounds like a great way for banks to make huge profit risk free.
        tax payers pay the bill if anything goes wrong.

      • Shocked 5 years ago

        Was in Tron Kong today.Have they ever fucked that city.You could throw a 1000 people out of a plane and nobody would hit the ground.Condo buildings every foot looks like shit.

  • Rob 5 years ago

    Strap in, prices are going to skyrocket.

    • Joseph Fresh 5 years ago

      We’re already seeing prices recover in Vancouver. Prices can only drop so much before recovering.

      • Big Joe 5 years ago

        until there is a global recession… like the waiting around the corner

      • RainCityRyan 5 years ago

        Which prices?
        I’m honestly curious as the only thing I’m seeing is prices reduced from initial list price ~7%.
        Is there a particular asset (SFD, townhouse, condo) in a particular region where this is the case?

        I have yet to see anything but a small increase in sales y/y (awfully hard to do worse than last July).

    • Trader Jim 5 years ago

      Maybe. Canadians won’t stop thinking prices can go up, until they suffer a catastrophic loss. The BOC and CMHC are moral hazard factories, and the issue won’t be fixed until people realize how reckless they are in protecting lenders.

    • Mtl_matt 5 years ago

      Yeah, food prices.

      • SUMSKILLZ 5 years ago

        FRESH food is already getting silly price wise. Now this currency war nonsense too.

  • Frost 5 years ago

    The lower rate is directly tied to the Federal Reserve recent rate lowering. When our Big Brother lowers it’s rate, Canada has to follow. The US will continue to lower it’s rate to be more competitive (pressure from POTUS) thus Canadian rates are going down. And for those naive enough to think “but muh we are independent because we are Canada and not the US” go change your diaper.

  • Puzzled Torontonian 5 years ago

    I started to wonder, are we getting something fundamentally wrong? do we live in a new world where you should not be hesitant to borrow and splurge?

  • Rana 5 years ago

    Banana 33 cent per lb boc has to cut interest rate to price it right

    • Frost 5 years ago

      Where are you finding Bananas for 33 cent a lb? I would love to go shopping at that store…

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