Canadians still have access to cheap credit, but it’s disappearing fast. Bank of Canada (BoC) numbers show the cost of borrowing is rapidly increasing as of last week. Over the past two years, a typical household loan has seen servicing costs rise by nearly a third.
Effective Borrowing Rates
The effective borrowing rate is the typical cost of borrowing for consumers. The number is a mix of mortgage and consumer rates, including discounted and posted. The data is from residential mortgage and consumer credit reports, as well as institutional lenders. A lot of analysis uses the 5 year posted rate, which is fine, but not a fair comparison since who pays the posted rate? Exactly. No one with decent credit who’s ever asked if they could get a better rate. The rate isn’t a perfect measure, but it gives us insights on credit tightening and the cycle.
The Typical Canadian Borrowing Rate Is Now 3.96%
The typical borrowing rate jumped to a multi-year high last week. The effective borrowing rate increased to 3.96% last Friday, up 3.39% from the month before. Rates are now up 15.78% higher than they were around the same month last year. That means borrowers today are paying up to 15.78% more interest to borrow the same amount. It’s a big jump in a short period of time, and almost half of the increases from the all-time low.
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.
Borrowing rates have increased significantly from all-time lows. The lowest Canadians have seen is 3%, last observed in November 2016. Over the past two years, we’ve seen this number jump a whopping 32%. That means the typical households is spending almost a third more on interest payments. Variable loan borrowers have already seen the extra money vanish, or principal contribution drop.
Hoping rates drop again? That may be a possibility, but the BoC is currently moving towards a neutral rate policy. Unless we see a major change in the macro environment, don’t count on rates to fall in the near term. If you’re on a variable rate loan, you should plan for spending a little more on servicing costs in the near future.
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