It makes me crazy sometimes when I know that the information people are taking as “truth” is in fact a myth. The most recent example of this is the mythology surrounding interest rates in Canada. While Mark Carney who heads the Bank of Canada seems to think that Canadians are living in a low-interest rate environment, he needs to get with some real people to see the truth.
Before I rant further, let me just make clear that I think Mr. Carney is doing an admirable job of keeping the Canadian economy on an even keel. The problem I have is the myth that people are benefitting from the historically low interest rates we’ve seen the Bank of Canada holding to for the past couple of years.
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So what’s my problem?
1. The only entities really benefitting from the record low rates are the banks. That phenomenally low rate of 1% is what banks can borrow from the Bank of Canada at, not what Canadians can borrow from their banks at. Sure, you might think that banks will pass on those record low rates to their customers. But you’d only be partially right. Most Canadians never get to see those low rates. Like Kathy who wrote to me to tell me that her bank was offering her a consolidation loan at 8.9%, or Lacey who has a line of credit at 10.25% or Jeremy who watched his line of credit interest rate rise to 11.5% because he was making interest only payments and the bank got itchy. Don’t even get me started on car loans, which seem to be up in the upper teens. And credit cards, and department store cards, and well, you get my drift.
2. Low interest rates have been used to entice Canadians to take on levels of debt never before seen. But those interest rates don’t stay low. Miss one payment, lose your job and have to renegotiate, or make any other misstep, like getting too close to your credit card limit, and watch your interest rate zoom up as your credit score dips down. Even closing a credit account can affect your credit score negatively, causing your interest rates on other debt to go up, even though you did nothing wrong!
3. The current home-price explosion is a direct result of low interest rates and CMHC’s willingness to cover banks’ butts. If the bank doesn’t have to worry about defaults, which it doesn’t if CMHC is covering the mortgage, they can just hand out money willy-nilly, which they do. Daniel wrote to tell me that his bank advisor had suggested that he not put 20% down, but go with a 10% downpayment and use the rest of his money, to buy all that furniture and other stuff he was going to need for his new home. Daniel was smart enough not to listen to this less-than-stellar advice designed to protect the bank’s backside and increase his costs. I’ve even heard from some mortgage brokers that banks offer lower interest rates to people with 10% down than those with the 20% that would avoid CMHC fees.
If you’re one of the few Canadians who have borrowed money at 2.5-3%, count yourself among the lucky. Most people are edging close to double digits if they’re not already there. And this is in a “low-interest rate environment.”
This interest rate myth is a perfect case of creating a healthy economy today on the back of income yet to be earned tomorrow. Perhaps if Mr. Carney climbed out of the office tower and had a chat with some real people, he’d know the myth for what it is.