Canadian Household Borrowing Rates Have Nearly Fallen Back To Last Year’s Levels

Canadian borrowing rates are dropping from the multi-year high reached earlier this year. Bank of Canada (BoC) numbers show the effective household borrowing rate is falling as of July. The rate, while lower than peak, is still significantly above 2017 levels of cheap credit.

Effective Household Borrowing Rate

The effective household borrowing rate is the interest rate a typical household pays. The number comes from consumer and mortgage loans, using posted and discount rates. The loan data is directly from lenders, so it’s one of the most accurate pictures available. The rate shows us what real people are paying, not what’s advertised.

When looking at the rate, we’re not looking at actual number so much as the direction. If it moves higher, lending is getting tighter. If it goes lower, lending is becoming more loose. The former implies the economy is getting stronger (with a few exceptions). The latter implies credit growth needs stimulus, which is generally a bad thing. One notable exception is 2015, when the BoC cut rates in what they thought was a recession. The 2015 recession C.D. Howe argues never existed, but the stimulus was already given. We’ll file that under W, for “Whoops.”

Household Borrowing Rates Are The Lowest Since… A Year Ago

The effective borrowing rate paid by Canadian households is coming down. The index fell to 3.75% on July 5, down 1.31% from the month before. Rates are now up 1.63%, when compared to the same month last year. They haven’t been this low since… well, the same week last year.

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.

Credit Still Isn’t As Cheap As It Was In 2017

Rates are trending lower, but they are not as low as they were two years ago. The 1.63% increase may seem small, but in 2018 rates increased a massive 21.78% during this week. Canadians are still looking at a 23.76% increase compared to two years ago. If the impact is still too abstract, it’s best to think of it like a mortgage rate.

Canadian Household Borrowing Rate Change

The 12 month percent change for the effective interest rate households faced on Jun 14.

Source: Bank of Canada, Better Dwelling.

If this were mortgage rates, the impact over the past year is minimal. The current increase in the borrowing rate would have reduced ~0.63% of borrowing power from a year ago. One year ago, borrowing power dropped 6.87% from a year before that. Today’s hike is minimal compared to a year before. This could be a sign that weak credit growth is something that may warrant stimulus soon.

The typical household borrowing rate is slowing in growth, but is far from 2017 levels. There’s been a sharp decline this year, but year-over-year growth is still happening. Dropping to 2017 levels would likely need economic shock to knock it down there. If economic shock happens, you won’t need to watch rates to know where we are.

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  • Feng Shu 5 years ago

    Isn’t it crazy to think it took 3 years to add $600 billion in mortgage credit to institutional lenders after the 2015 rate cut, but took 10 years to add the same amount before that? Canadians should know that was one of the worst steps Canada made towards this super-credit cycle.

  • GTA Landlord 5 years ago

    The credit stimulus is working in some regions. A lot of refis, and HELOCs are back to growth. Late bloomers to the credit boom.

    • Trader Jim 5 years ago

      In the stock market, it’s called a dumb money chase. People that saw their friends and family make a ton of money jump in when they can afford it, not when the trend is right. These people provide liquidity to early investors that made the most. Which hilariously reinforces the appearance that it’s a good investment. Funny thing is, if the people that made the most aren’t buying more, why are you?

      Usually pumped by institutions themselves, that are selling into the trend. When the rug gets pulled out and few people get to keep their gains, they smart money basically just says, “should’ve learned when to sell.”

      • Jack 5 years ago

        Trader Jim – Seems that trend is moving to Montreal. While they are cheaper in Montreal, prices in some areas have jumped 30% in the past year. My wife and I have money diligently saved to buy a house, except none of the overpriced houses on the market even interest us. As two working professionals with good salaries, I fail to see how people are stretching themselves with less income to pay premium prices for shitty houses.

        Meanwhile, Airbnb has pumped up the rental market due to less inventory, forcing people to looking into buying vs paying 50% more rent than they did 3 years ago. I am aghast at people lack of financial discipline, and their willingness to succumb to FOMO knee jerk house purchases. smh

  • Ethan Wu 5 years ago

    The email said “time for stimulus?”

    Technically the Bank of Canada is already providing stimulus. The CMB purchases they made are the equivalent of almost 3% of mortgage credit printed. Adjust that for interest, and that’s a significant injection of liquidity to suppress rates.

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