The Bank of Canada warned Thursday that growing household debt is now the biggest risk to the country's financial system and repeated a plea for borrowers and lenders to remember that the current era of super-low interest rates won't last.

While saying market conditions and the global economy have improved, and that Canada's exposure to a near-term negative shock has “declined modestly” in the past six months, the central bank used its semi-annual review of the financial system to highlight risks posed by homeowners taking on mortgages they may not be able to handle when borrowing costs rise.

“Households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates,” said the central bank.

“Financial institutions need to carefully consider the aggregate risk to their entire portfolio of household exposures when evaluating even an insured mortgage, since a household defaulting on an insured mortgage would likely be unable to meet its other debt obligations.”

The nascent economic recovery makes it less likely that “substantial credit losses” on Canadian households loan portfolios could infect the rest of the financial system, and the potential for “system-wide stress” as a result is a “relatively low-probability” risk, the bank said. Still, it noted that household debt remains “a key vulnerability over time,” especially with the ratio of debt to income reaching a record 1.42 in the second quarter of this year.