Interest rate myths

Most people aren’t benefiting from the historically low interest rates.



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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.

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.

9 comments on “Interest rate myths

  1. I was under the impression as a student that interest rates were going to be very low for me, as the BOC rate was 1%. Now that I am paying back my student line of credit at 4%, it has been a quick lesson to me that you never get close to the rates that the bank gets. I am lucky it isn't higher, but if it was 2% even, the bank would still make money off of me and I'd be able to pay off my loans a heck of a lot faster! Once I am out I don't plan on borrowing again, so luckily for me my dealings with banks and loan rates will soon be a distant memory!


    • Really, you're complaining about a 4% interest rate? Perhaps some historical perspective would make you more appreciative of how low that actually is for unsecured credit.

      IMHO, this is the real damage the low interest rate environment is causing, an entire generation that thinks these are normal rates (and I say this as a 35 year old). Ask your parents what interest rates were like in the late 70s/early 80s.


      • don't forget 65,000 for a home in 70's and 450,000 now, the difference is not the same.


      • I believe the point moneyaftergrad is making is that while the Bank's get to enjoy a rate of 1%, those same banks fail to pass this benefit on to the client. I am fully aware of how high interest rates were in previous decades. I don't believe moneyaftergrad was complaining about how high 4% is, but rather that it is significantly more than the rate the bank enjoys.


  2. Hear, hear. Way to tell it like it is, Gail. The best thing I ever did was pay off my debts: student loans and mortgage.


  3. My HELOC floated down to 2.25 % while my RRSP gic's were earning 4.5% .
    Its now up to 4% ,which means that as my GIC's start renewing at 2% I'm taking a portion of my RRIF that I'l be receiving next January and will have the LOC gone in two years.
    You have to respond to the changing times,that OSAP Student Loan has tax deductible interest which brings it slightly lower than that LOC.
    Hey I was paying 12.5% mortgage in 1983 ,I'l take these rates anytime,though the 4.5% on my GIC's would be nice again.


  4. Scott is right. Enjoy the low interest rates – 4% is incredible, especially for an unsecured loan. My mortgage was 2.25% for the last 5 years and I was happy to watch the principal slide down over those years. I just renewed at 2.99 for 5 years. So happy! Mortgage rules have tightened in Canada. Its not so easy to get a mortgage and I respectfully disagree with the comment that they are awarded "willy nilly" if they are high ratio. CMHC has strict lending requirements and a borrower has to meet them before a lender can access the insurance for their clients. I don't understand why there isnt more focus on consumer debt in terms of the high interest credit cards. How can it be permissable to charge 29% interest? That's debt that takes people down. Home ownership is good debt; just don't use your home as an ATM


  5. If you want to lower your interest rate than pay off your mortgage early through weekly payments and annual prepayments,I payed off mine in 14 years ,worked out to 1.89% based on the total interest payed over that period of time,you have no control over the rate but you do over how long you pay.


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