Canadian Household Borrowing Rates Resume Rise, After 6 Weeks of Stalling

Canadian households face higher borrowing costs, despite the lack of policy rate hike. Bank of Canada (BoC) numbers show the weekly effective interest rate for households reached an almost 10 year high. The increase comes after the effective rate had stalled for six weeks.

Household Effective Interest Rate

The household effective interest rate is a weighted-average index of consumer and mortgage rates. It includes both the posted and discounted rates, and draws data from lenders. It differs from a posted rate, because the data comes from what people are actually paying. You know, instead of the rate you see advertised.

The last part is important, because not all that many people pay the posted rate. Your bank’s posted rate is typically at least one point higher than they’re willing to offer customers. That means a slash to the posted rate doesn’t necessarily change the rate they offer their customers. In the event that they wanted to slash rates to drum up business by hacking the news cycle, they could do it without impacting margins. We’re not saying they are, but if they wanted to – you wouldn’t know.

Canadian Household Borrowing Costs Are Up Over 28%

Canadian borrowing rates finally increased after staying flat for weeks. On Jan 18, 2019 the effective interest rate was 3.99%, up 0.01 points from the week before. This represents a 28.7% increase compared to the same week last year. The weekly increase might not seem like much, but it breaks the flat movements we’ve seen since December 5.

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.

The annual movement is also noteworthy this week. The 28.7% increase in 2019 is the largest we’ve seen in a very long time. During the same week in 2018, the annual increase was less than half that, at a still high 13.54%. The year-over-year pace of growth was actually negative for the prior three 3 years. It would be a miracle if this didn’t impact borrowing any further.

Canadian Household Borrowing Rate Change

The 12 month percent change for the effective interest rate households faced on Jan 18.

Source: Bank of Canada, Better Dwelling.

Even though the BoC hasn’t raised interest rates, banks have been creeping rates higher. The industry is forecasting real estate sales will fall slightly in 2019, but clearly hasn’t considered borrowing costs. Credit capacity is falling faster than it was last year. How exactly do sales only make a slight decline, without a significant drop in home prices?

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  • Pat 5 years ago

    That’s funny, and I’ve never considered that. I’m 0.75 points under the posted rate. How do you get the full discount?

    • Isaac Brown 5 years ago

      Never go to your bank for the best rate. I opened a new business account at RBC, and the person that opened it flat out said you come here for convenience. If you’re considering a mortgage broker, we probably can’t beat what they’re offering.

      Do the math from your bank vs a mortgage broker. It can cost you thousands, if not tens of thousands, all because some people prefer to do it all in one building.

  • Yashua J 5 years ago

    Surprised you guys don’t paywall this stuff, considering it’s much more insightful than the stuff I’m reading elsewhere.

    Meanwhile, mainstream media bought the bank bait.

    • Ethan Wu 5 years ago

      Falling 5 year rates are more of a reflection of falling 5 year demand than anything. If they cut the overnight rate, then I’ll change my opinion on where this is heading. We won’t get a real rate update until April.

      • Don Angelicano 5 years ago

        I would look at it this way…as bond yields fall the banks’ cost of borrowing falls. So they pass along some of that to the consumer. What most people simply don’t realize is that only a small fraction of the savings are actually passed down to the borrower (i.e. if 5-year bond yields fall 40 bps, RY might cut their 5-year mortgage rate by 15 bps).

        Why is that the case? Because this lovely oligopoly is thinking about how they can juice their margins as the easy gains from explosive credit growth disappear. Isaac Brown…you made a great point…the unfortunate reality is that Canadians are lazy…they consume the bullsh*t their bank adviser feeds to them without question.

        Only when we get a bit smarter about how we deal with our oligopoly friends/crooks can we expect a truly competitive market where the banks have to actually compete for our business through pricing discounts (i.e. just like everywhere else on the planet). Take a look at the fees Canadian pay on everyday banking products and compare that with other countries…the differences are laughable and sad at the same time.

        • Ken Wang 5 years ago

          How about the genius Realtors encouraging people to pay anything for a house???

        • Smaug 5 years ago

          Increasing margins is only logical when the lenders perceive increased risk. And they’re perceiving that now, despite their denials. There’s plenty of competition between lenders, and rates are plenty low enough. Last thing Canadian borrowers need is even lower rates. They’ve been too low for too long, and there has been a cost to that, a cost we have not yet even started to pay.

  • ken 5 years ago

    Credit Cycle has turned. Rates must rise, regardless of what the Bank of Canada wants to do.

    • RMF 5 years ago

      Rates must rise, or dollar must fall. Since globalization, that means the value of your labor is reduced in order to keep home buying going. I know what I’m rooting for, but I don’t have any Canadian dollars in case I’m wrong.

    • CanadaSucks 5 years ago

      Letting the dollars fall down to low will create rapid inflation even hyperinflation. Think of Russia.
      Because Canada import a lot of goods from USA and China and manufactured very few goods for exportation (other then the auto industry) letting the dollar fall will mean higher price for almost everything we buy:clothes, food, tools.

      Keeping the rates too low for too long will also cause capital outflow toward nations that pays higher interest rate on deposit.

      • Im Therious 5 years ago

        How many of you have completely sold out your Canadian positions..?

      • Bluetheimpala 5 years ago

        Can you clarify how a resource based economy with a wide range of mining and agricultural exports doesn’t export much other than auto parts? Hi, I’m blue. I think we will be best of friends and as I recently found Jesus I am trying to be a better person. Thanks friend. Tock. BD4L.

        • CanadaSucks 5 years ago

          Canada’s merchandise trade deficit widened to CAD 2.06 billion in November 2018 from a downwardly revised CAD 0.85 billion in the previous month and above market consensus of a CAD 1.95 billion shortfall. It was the largest trade gap since May, as exports fell 2.9 percent month-over-month, mainly due to lower sales of crude oil and imports dropped 0.5 percent. Balance of Trade in Canada averaged 1318.38 CAD Million from 1971 until 2018, reaching an all time high of 8524.80 CAD Million in January of 2001 and a record low of -3984.60 CAD Million in September of 2016.

  • CanadaSucks 5 years ago

    Just for Info. Russian Central bank interest rate. Canada is very lucky to be next to US.C

    • Smaug 5 years ago

      Thanks Vladimir. You do realize that the high central bank rate in Russia is not a sign of strength right? You do realize that they MUST keep it that high to prevent capital from fleeing the country? Sure you knew that.

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