Canadian households are facing a more difficult time borrowing cash than last year. Numbers from the Bank of Canada (BoC) show the effective weekly borrowing rate reached a 7 year high. Rising interest rates and falling credit demand has sent the rate soaring from last year. The speed of the climb is likely to taper credit demand even further.
What’s An “Effective Interest Rate?”
The effective household interest rate is the typical rate you would get if you went to a bank for a loan. The BoC calculates it by using a weighted average of mortgage and consumer loans. These rates are lower than posted rates, because it also includes discounted rates. The effective interest rate more accurately reflects the lending conditions households face.
Canadian Households See Borrowing Cost Rise Over 18%
The cost of borrowing is making steep climbs, as lenders try to cool the debt binge to sustainable levels. The weekly effective borrowing rate reached 3.77% at the end of July, up 18.55% from last year. In addition to it being the highest level we’ve seen since May 2011, it’s also one of the fastest climbs. We haven’t seen this rate climb this quickly since before the Great Recession.
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.
Slower Borrowing, Smaller Amounts
Considering the speed at which lender rates are climbing, it’s going to have a big impact on borrowing. For example, a mortgage borrower at today’s effective rate would qualify for ~7% less than one last year. That’s assuming the household made roughly the same income, and before stress testing. Households face a serious loss of leverage, which may be a good or bad thing. It depends on if you make money from households having more leverage or not.
In addition to lower leverage, rising rates impact existing borrowers and future demand. Existing borrowers face higher servicing costs, lowering free cash flow. That’s a big loss for consumer industries that depend on long-term financing. Higher servicing costs also tend to lower demand for new credit. This has the counterintuitive effect of tightening credit supply even further. Lower credit demand usually leads to stronger vetting of borrowers.
Like this post? Like us on Facebook for the next one in your feed.