Canada's chartered banks haven't quite sunk to the level of those shrill, high-volume vendors of discount furniture and cheap electronics who are constantly bombarding us with ads touting zero down, zero interest, zero payments for 18 months.

But when it comes to their mortgage-lending practices, they've wandered into the same low-rent district.

In the past year or so, most have begun offering zero-down mortgages, in which the prospective borrower doesn't have to put a nickel on the line in order to make what is generally the largest and most important investment in the average person's life. The banks have also begun allowing borrowers to stretch the amortization period from the old maximum of 25 years to a new one of 40 years, and mortgagees who take up that offer will find themselves paying next to no principal for years and years to come.

These newfangled gimmicks, which have been borrowed from the U.S. market, are part of a long-term change in our banking industry. For the past 15 years or so, since the end of the last major recession in other words, the banks have been making it easier for homebuyers to obtain credit.

Where they once demanded 25 per cent upfront before granting a mortgage, the banks have steadily lowered that bar, the result being that downpayments currently average about 15 per cent, according to industry experts.

To some extent, the bankers are merely responding to changes in the real estate market. Housing prices have risen so sharply in recent years - from a national average of $150,720 in 1995 to $314,258 in May 2007 - that not many first-time buyers, and even many who are moving up to bigger homes, can come up with a 25-per-cent downpayment.

But competition between the banks has also played a role. They are all furiously chasing the mortgage market. They are all trying to grow their business and, to use an industry phrase, increase their share of wallet. One way for a bank to get its hands further into your wallet is to offer easier terms of credit than the competition. Another way is to pay the interest penalty for homeowners who are willing to move their mortgages across the street before the term has expired.

The banks have greased the wheels of a booming market in both new homes and resales. Coming out of the recession in the early 1990s, housing starts dipped to 110,933 in 1995 and then rose annually for nine years to a peak of 233,431 in 2004, according to Canada Mortgage and Housing Corp.

Last year, they stood at a very healthy 227,395. The resale market has been equally robust, growing from 260,993 transactions in 1995 to 483,700 last year.

The housing boom has occurred despite rising prices because interest rates have been low and stable, the job market has been strong and easy credit has been available at the banks.

But now there are signs that one part of that equation may be changing. In mid-July, the Bank of Canada raised its trend-setting rates by one-quarter of one per cent to 4.50 per cent and the chartered banks immediately raised their prime lending rates.

Many observers believe that the central bank may boost the cost of money by a similar amount once more and maybe twice by the end of the year in order to keep a lid on inflationary pressures caused largely by the overheated economies of the western provinces. But some experts contend that the bank's ability to raise rates in order to fight inflation is severely limited because the level of personal indebtedness in Canada is so high.

"A moderate increase by historical standards of one to 1.5 per cent would be very powerful in terms of its impact on consumers," says Benjamin Tal, an economist with CIBC World Markets and the author of a widely quoted report on personal bankruptcies issued in early July. "The savings rate is close to zero, which means people don't have a cushion against economic shocks."

Tal points out that the use of credit has been rising by about 10 per cent a year while incomes have only been growing by half that amount. As a result, the debt-to-income ratio for individuals now stands at 120 per cent in part because so many people are carrying large mortgages.

Homeowners who have paid down their mortgages in many cases have then turned around and borrowed against the equity in their homes to pay for household improvements and other things. Indeed, Tal says home-equity loans have become so popular that they have helped keep consumer spending healthy in recent years.

Canadians have been binging on credit since the last recession, thanks in no small part to the loose lending practices of the chartered banks, but this party has the potential to end badly.

If inflation begins to rise, older people living on fixed incomes and Baby Boomers heading for their golden years will demand action from the Bank of Canada. Otherwise, the value of their savings and the quality of their lives will decline.

But a sharp spike in interest rates could be a knockout blow for all those homeowners, many of them younger couples, who bought homes with next to nothing down and are already struggling to pay their sky-high mortgages.

(D'Arcy Jenish can be reached at jenish@businessedge.ca)