Weekly Effective Interest Rates
Household Effective Interest Rate
The effective interest rate for households is a weighted-average of various mortgage and consumer credit interest rates. The weights are derived from residential mortgage and consumer credit data, adjusted for additional information provided by financial institutions.
Mortgage rates are a mix of both discounted and posted mortgage rates, with terms ranging from variable to five-year fixed. Consumer credit rates include secured and unsecured lines of credit and other forms of credit such as auto loans. Each is a function of the prime lending rate, adjusted on the basis of the estimated historical spread to account for loan heterogeneity. Consumer credit rates are also adjusted to account for movements in bank funding costs, so as to estimate the effective lending rate faced by new borrowers. Regarding consumer credit cards, information available from the Canadian Bankers Association (CBA) shows that credit card rates have hovered around 22 per cent since 1995, therefore we assume this credit interest rate is constant.
The credit weights are derived primarily from the Canadian Financial Monitor (CFM) conducted by Ipsos Reid, which provides detailed data across a wide range of credit related to household finances. In addition, qualitative information, such as new mortgage type borrowing behaviour, is collected from regular chartered bank site visits and the Canadian Association of Accredited Mortgage Professionals (CAAPM) survey.
Business Effective Interest Rate
The effective interest rate for businesses is a weighted-average borrowing rate for new lending to non-financial businesses, estimated as a function of bank and market interest rates. The weights are derived from business credit data.
The business effective rate is a function of: short-term commercial paper and bankers’ acceptance rates, with terms of one and three months; the bank prime business lending rate, which is adjusted for movements in bank funding costs, so as to estimate the effective bank prime lending rate faced by new borrowers; and longer term borrowing rates, approximated using Merrill Lynch bond indices, which include both investment and non-investment grade companies (non-financial).
The business credit weights used to estimate the effective business rate are derived from Bank of Canada business credit data.