It's a myth that households are piling up too much debt and heading for disaster, says a new study by Canada's largest bank.

The study was released this week by RBC Financial Group, a division of the Royal Bank of Canada.

It says the "belief that household finances are in a precarious state that poses sharp and imminent credit risks" is dead wrong.

"The prevailing outlook on North American household finances underestimates employment, personal income and productivity growth," says Derek Holt, assistant chief economist for RBC Economics. "While there is room for caution, too much emphasis is being placed on highly flawed measures and misleading beliefs that overstate risks to the economy."

The study contradicts warnings that North American households are over their heads in debt, including a report by rival Scotiabank in January that suggested households were vulnerable because of the high debt levels.

But fears that household debt is too high are based on the debt-to-income ratio, which Holt says is flawed because it compares an individual's total debt to a single year's income, rather than over a lifetime of income. "People borrow out of future income to satisfy their housing and other spending needs and desires, so why compare debt amortization over much of one's lifetime to a single year's income?" says the report. "Arguably, all that household debt-to-income ratios indicate is that North American capital markets are highly developed and, therefore, offer a multitude of borrowing and saving instruments, making it possible for borrowers and savers to smooth their income and spending needs over many years."

The report says that most of the debt is used to acquire assets such as real estate, rather than expenses that do not provide potential returns.

Another myth, says the study, is that households will be in trouble once the low interest rates begin to rise. Interest rates are expected to start edging upward during the next two years, but the study says a large increase in rates is unlikely. But it adds that Canadians have packed away record high levels of cash in recent years. "If needed, the amount that Canadians have tucked away in chequing and savings accounts, money market funds, and cash holdings over the last three years alone could be redeployed to service up to a four percentage point increase in the debt service burden in Canada," says RBC Economics.

The study says approximately one-fifth of disposable income is currently being saved by Canadian households, and that while homeowners may not be saving much off their paycheques, they are seeing the value of their house rise while they continue to pay off their mortgage. Adrienne Warren, one of the authors of the Scotiabank report, told The Canadian Press that the RBC study seemed to rely on "theoretical economics of a life cycle" rather than debt versus current income.

Canadians currently have a reported $438 billion in mortgage debt. Recently Canada Mortgage and Housing Corp. eliminated the requirement for homeowners to come up with their own down payment for mortgage-insured homes. At the other end of the income scale, Re/Max recently issued a report that says wealthy baby boomers are bucking the traditional trend of paying down their mortgages before they retire, and taking on new mortgages for their retirement homes.

"As the first wave of baby boomers head into their retirement years, Realtors and builders alike are scratching their heads," says Elton Ash, vice-president of Re/Max of Western Canada, in a news release. "Bigger, better and more expensive homes? Most of us work all our lives to be mortgage-free…the thought of incurring debt at this stage of the game has given many of us reason to pause."

The Re/Max report says 50 per cent of Canadian homeowners between 45 and 54 years of age and 35 per cent of homeowners between 55 and 64 held a mortgage in 1999. In 2001, those figures rose to 61.6 per cent and 39.1 per cent – an increase of 2.6 and 4.1 respectively.

"Money is so cheap these days, the principal residence has become part of the overall investment strategy and ultimately, the retirement plan," says Ash.

Million-dollar residential mortgages, which used to be rare, are now being issued on a regular basis, says a story in The National Post. Paul Mims, vice-president of CIBC Mortgages Inc., told the Post that mortgages for more than $1 million have climbed by more than 20 per cent compared to the same period last year.

There is one sign that the spending may slow down, however. A survey conducted for CIBC by Decima Research shows that 82 per cent of Canadians believe that mortgage interest rates are as low as they will go. Most believe that the best mortgage strategy now is to lock into a higher-rate, fixed-term, fixed-rate mortgage. If consumers believe that rates have hit rock-bottom, they may make their move now and then sit back to watch their home equity grow.