Canada

Canadian Households See Borrowing Costs Rise To Highest Levels Since 2011

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.

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19 Comments

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  • Sammy 3 months ago

    Whatever did households do when rates were at 2005 levels (4.85% on your chart)? People will take out as much credit as frequently as possible, regardless of rates. Highest rates in 7 years is a nothing burger tbh.

    • Grizzly Gus 3 months ago

      Sure people max out what they can borrow at any given rate, and since prices were the same back in 2005 as they are today what could go wrong……… a big nothing burger indeed

    • vnm 3 months ago

      You mean when house prices were a fraction of what they are now, that 2005?

    • SUMSKILLZ 3 months ago

      Not sure I agree. When auto loans were 0% or 0.5%, i’d look at financing $40 000 cars. Now, given the rates, i’m looking at $30 000 cars for my next car. Can I afford more? Yes. But i refuse to pay thousands on interest. It changes my budget psychologically.

      • RM 3 months ago

        … because you’re a fiscally reasonable person. The stats show that most people are not.

  • Ahmed 3 months ago

    The central bank insanity in one chart. Almost nothing for 8 years, then a rapid rise over the past year. Wouldn’t the smart thing be to hike gradually over those 8 years, and we wouldn’t have a bubble or sudden decline in borrowing? The Canadian government is stocked with the finest of clowns.

    • Pika 3 months ago

      Stimulus without the stimulus. By keeping rates this low, they can force people to spend. The insanity is by design, not by accident.

    • John 3 months ago

      Sure. If we ignore all reasoning for the low rates.

      Dont be so one dimensional in your perspective.

  • george 3 months ago

    Could someone please remind me why the sudden drop of the borrowing rate in less than 6 months? From Oct 2008 – April 2009 the rate dropped from 5.7% to 3.6% approximately.

    • Mcs 3 months ago

      Believe it had something to do with the price of oil dropping.

    • John 3 months ago

      Not sure if serious… or just 14

    • Grizzly Gus 3 months ago

      I’d say we got prescribed the same medicine the rest of the world received even though we only minor symptoms of the disease. Medicine got us hooked, withdrawal ain’t going to be fun. Cannabis might help.

    • Ryan Lynne 3 months ago

      The global financial system almost collapsed

    • Derpy McDerpison 3 months ago

      uhhhh
      derp

  • @xelan_gta 3 months ago

    Great article.
    That 7% affordability drop will affect everyone and there is no way around it.
    So if you hope that buyers are just waiting on sidelines – yes some of them are, but about 15% just can’t physically afford to buy/upgrade property anymore at current price levels because of rates and B20.
    Either prices must decline or incomes grow significantly, until that happens don’t expect that 15% local demand returning to the market. In fact this decline will grow even more because if nobody cheat B20 and go to credit unions/private lenders permanent demand drop would be 20%, not 15%.
    With every future 0.25% rate increase add about 2% to that number.

  • greathing 3 months ago

    Councillors and Mayors of Vancouver know this train wrek coming so they decided to retire and reapply for positions this fall. Next one I am watching for Mr Poloz and his predecessor Mr Carney to leave. Right before everything crashes down we will have a new BoC Governor Ms Wilkins so that everyone blame the predecessor who will no longer be there to take a blame. The truth is Ms Wilkins is equally complicit with the bad decision making of her colleagues.

    • Beh G. 3 months ago

      Hmmm… Carney left a long time ago and has been refusing to raise UK rates with 3%+ inflation and the British economy at full capacity!

      The problem is that after the Great Recession, central bankers started focusing too much on the risks ahead (i.e. guessing), rather than just looking at the numbers in front of them and therefore refused to increase rates when they were supposed to… that was previously the logic, increase rates when the economy is doing well and if those risks materialize you have room to deal with them by dropping interests rates again later.

      That created a cushion to deal with a crisis but that cushion got smaller and smaller and now there’s an urgency in Canada to catch up. The rates should have started going up in early 2014 before the oil price crash and they should have been gradually increased since but the BoC sacrificed the entire Canadian economy just to give a bit of stimulation to Alberta! An insane move that is unfortunately unfolding badly to this day.

  • Justin Thyme 3 months ago

    ‘The cost of borrowing is making steep climbs, as lenders try to cool the debt binge to sustainable levels. ‘

    Balderdash.

    The cost of borrowing is going up because banks are having to pay more interest on deposits. They do not give money out for free.

  • George 3 months ago

    Central Bank policy 101. Bubble, bust. Wash, rinse, repeat. Certainly explains the sharp rise in Canadian real estate prices, and why they are also now deflating.
    This is not really hard to understand when taken in context with the primary directive of central banks in general. Without a continuously growing crop of debt serfs and muppets, those central bankers would be out of a job.

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