Why the Bank of Canada is Concerned About Canadians’ Household Debt

According to the Bank of Canada (BoC)’s semi-annual Financial System Review, a 69-page document examining some of the key risks to the Canadian economy, many Canadians would have trouble managing their debt if a severe recession were to occur. Topping the list of “key vulnerabilities,” or areas of concern, are household debt levels and housing prices, particularly in Toronto and Vancouver. Here are some of the key takeaways from the report:

Household debt and housing prices are still the “most important vulnerabilities” for the Canadian economy—and they have both increased over the past six months.

Mortgage lending, especially in Vancouver and Toronto, is the leading cause of the household debt increase.

More Canadians are taking on riskier, uninsured mortgages, especially in cities with high housing prices. Homes that sell for over $1-million do not qualify for mortgage insurance, which is also not required for homebuyers putting more than 20 per cent down—but the concern is that buyers making these larger down payments might be overextending themselves.

An improving global economy has decreased the risk of a severe recession—but a rise in unemployment and decline in household income would make it hard for Canadians to pay their debts and have a significant impact on the economy. The BoC sees this as a “low probability” event.

The more likely event is a significant decline in housing prices in Toronto and Vancouver. The BoC notes that this would not have the same impact on unemployment and “business profitability” as a severe recession.

Key stats from the Financial System Review:

  • The Canadian household debt to income ratio is nearing 170 per cent
  • Nearly 90 per cent of the increase in household debt comes from mortgages and HELOCs (home equity lines of credit)
  • 46 per cent of Canadian mortgages are uninsured, meaning the owner made a down payment greater than 20 per cent
  • Mortgages and HELOC lending has increased by six per cent from a year ago; disposable income has risen less than four per cent in that time
  • In 2016, 27 per cent of mortgages had a loan-to-income ratio greater than 450 per cent—meaning that the value of the mortgage was more than 4.5 times the homeowner’s income


While the BoC has often said it would not raise interest rates to cool down the housing market, it is clear that household debt, as well as a rise in mortgage debt, remains a concern for the Canadian economy. An interest rate increase would also make it hard for many homeowners to keep making mortgage payments, so the best course of action would be taking steps to pay off your debt during this low-interest-rate environment.

Do you know what your loan-to-income ratio is? You can calculate it by dividing your mortgage debt by your annual income, then multiplying by 100. If you find that it’s higher than 4.5, it may be time to explore some of the debt relief options available to you.