All interest rates are expressed as annual rates - even for loans of less than a year. For example, we might invest OR borrow for a three-month period at an annual interest rate of 4%. At the end of the three-month period, we would receive OR pay interest equal to 1% of our transaction.

Interest rates are determined by supply and demand. The supply is the amount of money that lenders are willing to lend. The demand is the amount of money borrowers are willing to borrow. Businesses commonly borrow money to finance capital expenditures (such as purchasing new equipment and buildings).

When interest rates go up, the amount of money lenders supply increases ↑ because the potential return on their investment (ROI) is greater.

The amount of money borrowers demand decreases ↓ because the cost of borrowing the money is greater.
When interest rates go down, the amount of money lenders supply decreases â†“ because the return on their investment (ROI) is less.

The amount of money borrowers demand increases ↑ because the cost of borrowing the money is less.


Borrowers are able to borrow more money when interest rates are lower.

To purchase a house with a twenty-year mortgage, a buyer decides that the largest monthly mortgage payment affordable is $849.

Without increasing the monthly payment ....
  • At a 6% interest rate, the buyer can borrow $116 856.
  • At an 8% interest rate, the buyer can borrow $100 027.
  • At a 10% interest rate, the buyer can borrow $86 736 to buy the house.

The difference of 4% in the interest rate means a difference of $30 120 in the amount available to spend on a house.

Think about this...


In 2016, an Alberta family with a household income of $80 000 and the required minimum down payment of 5% would have qualified for a $400 000 mortgage. In 2017, new mortgage borrowing rules came into effect in Alberta. The Alberta family with a household income of $80 000 and the required new minimum down payment of 20%, now was approved for only $320 000. In January 2018, the federal government instituted a mortgage "stress test" that limits further the amount of mortgage money consumers can borrow.

Why were the rules changed?


If interest rates rise, the family still should be able to meet the higher mortgage payments on the smaller amount of money ($320 000). Making higher mortgage payments on the greater amount of money ($400 000) may strain the family budget and eventually lead to foreclosure. Banks don't want foreclosures. Banks don't want houses. Banks want money. Banks want mortgage payments.

Lenders are trying to ensure borrowers can meet their financial obligations.