Canada

Canadian Borrowing Rates Rise To A 7 Year High

Canadians looking for a mortgage or have a ton of household debt are going to start feeling the pinch. Bank of Canada (BoC) numbers show the effective consumer interest rate has hit a 7 year high. More interesting, Canadians haven’t been able to maintain a rate this high for more than 5 weeks in the past 9 years. Here’s where we are, and how it’s going to impact consumer borrowing for mortgages.

Effective Consumer Interest Rates

The effective consumer interest rate is the rate you would likely pay if you walk into a bank. The BoC uses a weighted average of mortgage and consumer loans to calculate the rate. They also use a combo of discount and posted rates, so the numbers look more like real household numbers. Oh yeah, only suckers and people with terrible credit pay posted rates, so…like, don’t do that.

Canadian Households See Costs Rise Over 13%

The effective borrowing rate is rising fast across Canada, and showing no sign of cooling. The rate reached 3.8% at the end of last week, up 13.77% from the same time last year. The increase is the highest rate we’ve seen since May 2011, although there’s a minor footnote. The level has only been this high for a total of 5 weeks since 2009. Historically, Canadians have started to cool their borrowing even faster at these levels.

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.

Higher Rates, Less Credit

The seemingly small hike has a large impact on both the quantity of cash you can borrow, and the cost of servicing. The effective rate at 3.8% means you can borrow 5.46% less than someone making the same amount last year. Compared to the all-time low hit in November 2016, that same household has 9.4% less borrowing power. In dollar terms, a household that could borrow $1,000,000 in November 2016, could only borrow $906,000 today. Making a little more sense why wealth managers have been a little bearish these days? Unless rates drop, generally a bad sign for the economy, that borrowing power isn’t coming back soon.

The impact will also extend to the economy, as households devote more cash to interest. For example, let’s look at a household borrowing a $1,000,000 mortgage at the all-time low of 3%, over 30 years. They should expect to pay $518,000 in interest, if rates theoretically could stay at the same level for the term. At today’s 3.8% rate, that would jump to $678,000 in interest, over $160,000 more than the all-time low. In Canada, all mortgages are limited by terms, so the rate will average up for both. However, the point is fast rising rates are going to cost the typical household a lot more.

The cost of borrowing rising isn’t a surprise after hitting all-time lows, but the speed can get messy. This is the fastest hike of borrowing costs since the Great Recession. Households can suddenly borrow less than those earning similar incomes just a few weeks ago. Additionally, those with variable rate loans will have reduced cash flow. The likelihood of there being no adjustment to asset liquidity and economic expectations is pretty slim.

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25 Comments

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  • Michael 2 months ago

    Good thing this year’s buyers were stress tested, those rates are going to rip right through that level with the Canadian dollar losing so much value so quickly.

    • Confused 2 months ago

      I could be wrong, but I think a point in the article is that rates have a hard time being this high for long?

      • MH 2 months ago

        Nope. The point is that overleveraged specs have a hard time surviving even these historically low rates for long.

        Rates can’t have a hard time. In psychology it is called projection.

        • Andrew Jerabek 2 months ago

          I think he meant the Canadian dollar has a hard time with the low rates.

  • Obi 2 months ago

    Not surprisingly, in markets where household incomes to prices don’t make sense, the $100k drop is about the normal decline on detached houses. I’m sure it’s foreign buyers or aliens or whatever you heard from your angry real estate agent though.

  • Party on 2 months ago

    It’s a bad combination – rising debt levels and rising borrowing costs

    At the end of June, 2018 the total debt outstanding in Canada (bottom line of the Statistics Canada credit market summary data table) was $7.895 trillion. At the end of June, 2017 the total debt outstanding was $7.501 trillion. In the 1 year period from the end of June, 2017 to the end of June, 2018 it increased by $394 billion. This is an increase of 5.3%.

    Canadian total (household, business, and all levels of government) debt numbers as of the end of June, 2018

    https://owecanada.blogspot.com/2018/09/canadian-total-household-business-and.html

  • Rick Abrams 2 months ago

    I do not think Canadians know how lucky they are that rates are rising.

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