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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26 Comments

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  • Michael 1 week 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 1 week 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 1 week 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 1 week ago

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

  • Obi 1 week 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 1 week 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

  • Justin Thyme 1 week ago

    Not sure if you are deliberately ignoring reality, or you are completely ignorant of it.

    It is not important how much money has been borrowed, but the ability of the borrowers to pay it back.

    Apple is one of the world’s richest companies. They have billions of dollars in cash. They are making a huge killing in profit with the new American tax laws. They are wallowing in cash. They are buying back their stock.

    But here’s the thing. They are buying back their stock, not with cash o hand, but with borrowed money. They are investing their OWN money in … the stock market. that is right, they are buying stock of other corporations. They are using the stock market as their bank.

    There is a new corporate zeitgeist, that is completely changing the old economic indicators. People that are ‘loaded’ with cash, are not spending their own money, they are borrowing it instead. They are keeping the cash on the ‘asset’ side of the ledger. Improves their financial position. Loans are on the liability side of the ledger. As long as assets are high, and the balance sheet is positive, their company looks much better than it is. Keeps their stock price high.

    Even the wealthy are catching on.

    When you have a cash balance of say one million dollars. and want to buy stock, you borrow one million dollars to do so. That way, you have one million dollars in cash AND one million dollars in stock.

    Do the banks worry about you paying back the one million dollars? Not when you still have one million in cash on hand.

    Using debt figures in isolation to measure the strength of an economy is just blathering on with hyperbole. It is the ‘balance sheet’ that matters. The ability to pay back the loan. And the Bank of Canada certainly has those figures.

    • SMH 1 week ago

      Surely nothing can go wrong with that strategy

    • Enough of this 1 week ago

      If the many think the way you do, then this country is in serious trouble…

      1. Apple decisions with cash does NOT equal household decisions with cash.

      2. Real estate is NOT stock. Liquidity is vastly different between the two.

      3. Debt ALWAYS kills when cycle turns if load is too extensive. By the looks of things, “extensive” is an understatement for a lot of folk. The “asset” side of your Leger is fiction if not actual cash.

      Just finished lunch with an associate selling a home that he bought last year. He accepted an offer while sitting in front of me that translates to a 250k loss..

      Very sad, but far from uncommon today.

      What killed him?

      I’ll leave it to your imagation.

      And btw, if I shared your philosophy with him, I’m sure his response wouldn’t be nearly as polite as mine

      • Enough of this 1 week ago

        Ledger

      • Bluetheimpala 1 week ago

        yuuuuuppp. BD4l.

      • Joe 6 days ago

        Meanwhile, Toronto proper properties are starting to sell well again.

        21 Dunbar Rd, in Rosedale, sold 3 months ago for 2.275m and recently sold again for 2.55m.
        189 Havelock St, in dufferin grove, sold for 1.91m, 19% over asking. (probably a record price for a semi in that area).
        74 Barrington Ave, in East York, sold for 925k, another record for a bungalow in that area.

        Sales are slower than the peak in early 2017 but prices are climbing up now in many pockets of Toronto…of course there are many properties that didn’t sell well or are still selling below their peak but it might be the “denial’ stage of the cycle where prices climb up a slightly before a big crash? (not sure if I got that denial stage right but I seem to recall a small bump up in the housing cycle in an article posted here not too long ago.)

        Anyone think that this is the stage the housing market is at now? Or maybe I am wrong and it is the recovery stage…

        • Enough of this 5 days ago

          Selling well indeed..

          Allow me to cherry pick as you have.

          278 Dunview Ave., Toronto

          Bought 3/2017 – $3.38 mil

          SOLD – 7/2018 – $2.39 mil

          Mic drop

          • saub 5 days ago

            same owners selling both times, deal must have fallen through on the 2017 deal.

          • saub 5 days ago

            Same owners selling both times, deal must have fallen through on the 2017 sale. Regardless, major price correction.

          • Joe 5 days ago

            Ok, my bad for cherry picking…how about 4.7% average price increase in YoY? :p

            Mic broke

          • Enough of this 4 days ago

            Joe… The delusion with the 416/Toronto vs the world/we are the chosen people/this time it’s different crowd is remarkable. There are already massive cracks in this narrative that will only get worse.. The Dunview e.g. is one of many many many others.. Looking to hearing of your tears when the debt brakes you and everyone else that thought they were invincible. Not an if but only a question of time before brunt of the storm hits.. people can only be warned for so long. Stupidity and arrogance deserves BK

            MIC DROP

          • Joe 3 days ago

            Well, only time will tell…I don’t believe 416 will fall…there are too many factors in favor of 416 and while I am not delusional that prices will have double digit gains every year, I am confident of housing prices having decent YoY gains (i.e. above inflation level/cost of carrying).

            I will buy you some mics to do Mic Drop next year 😀

    • Bluetheimpala 1 week ago

      Correct. And as we’ve seen by analyzing income levels, personal debt levels and cost of living you raise obvious; there is no more money. We over-leveraged when rates were low and now with the ascent the limited discretionary we had is being gobbled up by debt or worse, people are now borrowing to meet their short term obligations which will only lead to disaster. Also comparing personal finances with a stock analogy is subversive because on the surface comparisons like this ‘make sense’ right? Wrong! A company like apple has a steady income flow that grows and they are able to carve of different revenue channels and have R&D; their job is to grow and provide a return for their shareholders, that’s it (in fact, it is law). Also their BS can be reigned in by adjusting their PL and cash can be generated by issuing debt and stocks…the point is, while I ‘see’ what you’re trying to do, it is patently false and someone will take this and run with it.. While a mix of debt and cash is always advisable to suggest the strategy is loading up on debt based on your current accounts and then what? Is apple keeping that $1M to backstop the loan? 1-for-1? No, they understand their cashflow and support their debt through foretasted CF based on a combination of revenue growth but also PL + BS adjustment which REGULAR PEOPLE DON’T DO! Sure the wealthy may play in this space but even generally ‘rich guys’ don’t saddle themselves with debt to someday get wiped out after paying multiples to service the debt. Come one man…don’t spread filth. BD4L.

    • Bluetheimpala 1 week ago

      I remember months ago when I called you out JT. You defended yourself and I have you the benefit of the doubt. No more. You are subversive. I am the elephant Liam neeson. I will be coming here ever day to make you look like a fool so think to yourself;is it worth it? Do I really want to have ‘full blue’ unleashed? Does that ever lead to a positive outcome? I know you don’t care. Neither do I. Time to burn. Tick tock. BD4L.

      • SCE 5 days ago

        You are going to make JT look like a fool? You’ve been chirping about how the housing market will crash when there is no indication that it has yet. Yes, there was a correction but things have stabilized. You hide behind future predictions, protect yourself from what’s actually going on in the market now. Who really is the fool here? How much longer can you chirp on about know what’s to come when in fact nothing you say has been correct? OK there elephant man!

        • Joe 5 days ago

          As Blue likes to say Tick Tock…only time will tell…let’s see if the bears or the bulls win in the coming months. I’m also waiting for the crash that many here think would happen…so far no big crash.

          Though I must say it is true that fundamentals (income to debt ratio) don’t make sense but I think most people are still managing their debt obligations well. From what I see, unless there is a full blown recession caused by NAFTA failing or something on this magnitude, I don’t think there will be a crash…but let’s see!

        • Enough of this 4 days ago

          There was a correction?? Stabilizing??? You must be one of those guys that thought the Jays would win the WS the past few years.

  • Rick Abrams 1 week ago

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

Comments are closed.