rates
LOWER RATES STIMULATE ECONOMIC ACTIVITY
For most people, it’s easy to comprehend that interest rates are falling (and to see by how much), but it’s more challenging to understand what it means for their monthly debt repayments. To help with this, we’ve used CMHC's benchmark 5-year conventional mortgage rate, assumed a 30% gross-debt-service ratio and calculated what the monthly cost would be to service $100K worth of debt (including both principal and interest over a 25-year amortization period). Not surprisingly, the pattern in monthly charges mimics that of the interest rate, with payments having risen over a five-year period,
but having declined compared to one year and one quarter ago. At $545, the current monthly payment associated with $100K of debt is $12 lower than in Q1 2019 and $2 below that of Q2 2018. In comparison, the monthly charge on this representative amount owing is still $16 higher than five years ago, when short- and long-term rates were at historic lows. To the extent that the most recent changes in borrowing costs haven’t been capitalized into asset (home) prices—which they likely have not—this is a boon for borrowers, and will help, at the margin, to stimulate economic growth in other sectors.
THE COST OF SERVICING $100K IN DEBT JUST WENT DOWN ›
$560
$557
$550
$545
$547
$540
-$12
$529
$530
-$2
$520
+$16
$510
Q
Q
Q
Q
ASSUMPTIONS:
YEAR AMORTIZATION CMHC CONVENTIONAL YEAR RATE % GDS
SOURCE: RENNIE DATA: MONTHLY
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