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Canadians have a lot of debt – and Canada’s banking regulator is worried. It should be.

Of particular concern is what’s called a readvanceable mortgage. This debt combines an ordinary mortgage with a home equity line of credit. As the mortgage principal is paid down, the line of credit can increase – possibly creating a state of permanent debt. That’s pretty much how the Bank of Montreal promotes it: “Borrow some. Pay back some. Borrow again. Pay down your mortgage. Borrow even more.”

“Borrow even more.” This has been the story of the past two years. At the end of March, the value of combined mortgage-home equity line of credit loans stood at $737-billion – up by a third since the start of the pandemic. The jump has led the Office of the Superintendent of Financial Institutions to consider tightening the rules. OSFI has warned about the possibility of “vulnerabilities” to Canada’s banking system and suggested it may push banks to count readvanceable mortgages as riskier than currently required. That would make it more expensive for banks to offer them to customers, and temper their use.

OSFI’s deliberations come at a time when there is a striking mix of good and bad news in the financial state of Canadian households.

There’s a lot of wealth, but also lot of debt. Canadians have a big pile of savings, built up during the pandemic, and unemployment is low. But inflation is high and interest rates are rising.

Underlying all of it is Canadians’ dangerous love affair with housing.

Statistics Canada reports the net wealth of households reached a record $15.9-trillion at the end of 2021 – more than 20 per cent higher than $13-trillion in mid-2020. The key propellant was turbocharged real estate.

In the same report, Statscan also looked at the other side of the ledger – debt. At the end of 2021, the ratio of how much households owed compared with their disposable income reached a record high of 186.2 per cent.

That number means households owe $1.86 for every $1 of their disposable income. A decade ago, it was $1.68 and the previous peak was $1.85, in the summer of 2018. The figure puts Canadians among the most indebted in the world, ninth in the OECD, and well ahead of people in the United States.

Like OSFI, the Bank of Canada has eyed all of this with wariness – and has worried about how financially stretched Canadians could one day become a risk to the broader economy. “High debt levels mean the economy could react particularly badly to certain types of shocks,” said Bank of Canada deputy governor Paul Beaudry last November. Potential shocks with painful feedback loops include job losses, falling home prices and rising interest rates.

The precarious state of housing in Canada, and all that debt, was a subject the central bank returned to in mid-May. The bank is in the process of raising interest rates, but it has to keep a careful watch on what rising rates do to indebted homeowners. To curb inflation, the bank wants to cool the economy just a little bit – a measured tap on the brakes – but high debt levels means each rate hike may hit hard. Uncertainty about the effect of all that debt could make things challenging for the bank.

“This slowing might be amplified this time around because highly indebted households will face high debt-servicing costs and will likely reduce spending more than they would have otherwise,” said Toni Gravelle, a bank deputy governor, in a recent speech. One flashing number Mr. Gravelle pointed to was the debt-to-income ratio of 186 per cent.

What it all adds up to is a big note of caution.

For years, Canadians feasted on ever-higher real estate prices. Home equity lines of credit, including readvanceable mortgages, are popular, an easy way to pull money out of the cash register of higher home prices. These loans can come in handy, whether paying for renovations, vacations or even investments in other properties. When your home is worth $2-million and rising, what’s the problem?

If home prices could go up forever, there would be fewer worries.

But with the housing market at elevated levels and interest rates rising, a cooling is likely. It would also be entirely desirable – if debt were not so high. OSFI considering stricter rules around home equity lines of credit is clearly prudent. And long overdue.

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