As expected, in fact telegraphed by the Bank of Canada itself, the target overnight rate remains unchanged at 0.25%. This is where it is likely to stay in the near term as the Bank has stated that negative interest rates are not a tool they will use and it expects the recuperation phase to be slow and choppy due to economic uncertainty and structural challenges – so rate is not rising either.

This means that variable rate mortgages will continue to stay low and possibly get lower as the discounts to prime continue to increase. Eventually those variable rates will start to creep up when the overnight rate increases as the economy fully recovers from it Covid-19 induced GDP crash. While seemingly temporary, the annualized real GDP declined by 39% in the second quarter as all components of aggregate demand weakened.

Fixed rates have dropped rapidly over the last year. During the early stage of the pandemic, even with a significant quantitative easing program, fixed rates held steady likely as a result of increased risk premiums from lenders usual funding sources. As Canadian banks are able to return to the debt markets that seek lower risk premiums, increased saving and the quantitative easing program are now lowering fixed rates to historic lows.

These low interest rates, variable and fixed, are supporting the almost hyperactive residential real estate markets. While borrowers are a bit constrained by the regulatory imposed stress test, the low rates give borrowers increased appetite for homes. Eventually, the other driver of the market, sellers and buyers will come back into balance and the market will plateau.

With the majority of job losses seemingly concentrated in lower income areas of the economy, most borrowers seem to be able to maintain their mortgages and for most people, the mortgage is the last payment to miss so frequently predicted housing crash seems a remote worst case scenario that is unlikely to occur.

Conclusion? With the rapid rise in home prices and subsequently valuations and extremely low fixed and variable rates it might be a very good time to use your home’s equity to finance renovations, payoff more expensive debt or other investment opportunities.

Canada’s residential housing market has exploded as the pandemic’s confinement measures have eased across the country. All the transactions that were put on hold during the traditionally busy spring market have shifted to summer and the strong volume and prices seen in July are expected to continue through August and September.

What happens next? As the leafs begin to turn it is expected that the residential housing market will return to a lower baseline. At present, it is very much seller’s who are reaping the benefit of pent-up demand, low interest rates and lower inventory.

Low inventory is possibly the strongest driver of the current market. The sales-to-new listings ratio has hit its highest level in 18 years at 0.74 which is a supply and demand condition that sees the sellers in control in many markets. If inventory does not begin to enter the market, near term price acceleration is very likely.

Interest rates are likely to stay low in the short term and the Bank of Canada has gone so far as to say that the target overnight rate will stay low into 2022. Subsequently, people choosing variable term rates should begin to consider locking in at a low fixed rates as 2022 approaches as the variable rates could jump quickly as the target overnight increases when the worst of the economic stress brought on by the pandemic begins to work itself out of the economy.

If you are an investor, be leery as this could well be the top of the current market. If you are buying a home and your horizon is 10-15 years, do not let that opportunity for the house of your dreams pass you by but make sure it really is the home you want as you might feel a bit of buyer’s remorse in the medium term.

In an interview with BNN Bloomberg the Bank of Canada’s Governor Tiff Macklem says “There’s a lot uncertainty around that scenario, but I think the message is pretty clear,” he said. “Interest rates are going to be very low for a long time.”

As expected, the Bank of Canada has maintained the target for the overnight rate at 1/4 percent (Bank of Canada press release). With most banks offering a discount of 30bp (0.30%) to their prime rate (generally target +220bp (2.20%), variable rates will remain in the vicinity of 2.15% or slightly lower until the Bank of Canada is confident that the economy has reached its pre-Covid19 level. It should be noted that certain economists were beginning to see economic weakening prior to situation caused by the global pandemic. Both Bank of Canada Governor Tiff Macklem and his predecessor made clear that 1/4 percent is as low as the target rate will go and that the Bank of Canada sees no benefit to creating negative interest rates by lowering the rate further.

For the real estate market, the low target, declining risk premiums in the bond market and a lack of inventory coming into the market will keep the housing market in the sellers favour. There maybe a brief period when inventory returns to the market, continued higher than usual unemployment and decreased immigration where the market slides into favour of the buyers but as the economy recovers the residential real estate market should return to pre-Covid19 position regardless of the massive government debts taken on to combat the economic effect of the pandemic.

For those still under financial stress due to job loss, diminished hours and financial uncertainty caused by the ongoing pandemic measures some relief has been extended by the a few of the major Canadian banks.

The Royal Bank of Canada and Toronto-Dominion Bank have each extended the deadline to apply for deferrals – payment pauses – on mortgages, credit cards, lines of credit and other loans until September 30th.

The Canadian Imperial Bank of Commerce will also approve new deferrals for clients who have yet to access the program until September 30th. According to CIBC spokesperson Trish Tervit, other relief could be available on a case by case basis.

According to spokespeople from the Bank of Montreal and National Bank, needs are being assessed on a case by case basis.

Canada’s banking regulator the Office of the Superintendent of Financial Institutions has some concern that the deferral programs are masking the potential for a wave of defaults. RBC and National Bank are reporting that the majority of borrowers who deferred are returning to full payment status.

If you are deferring, you do need to be aware that the interest for each months deferral will be added to the capital balance of your loan in some fashion and that the term of your loan is essentially extended by one month for each month you miss if you do not accelerate or lump sum the amount deferred in some manner. In finance there is no “free lunch”.

If your deferral is running out – or you want to defer for the first time, be proactive and contact your financial institution. There is a reason why you likely insured your loan with CMHC, Genworth or Canada Guaranty and your financial institution does not want you to default, they will help.

A lack of inventory is keeping real estate prices squarely in the sellers favour as buyers compete for the housing that is available in Montreal and Toronto.  Vacation properties are also seeing brisk activity as traditional summer travel plans are disrupted by ongoing pandemic.  Is this situation temporary?  Lauren Haw, CEO of Zoocasa talks with Financial Post’s Larysa Harapyn.

If the recent announcements by CMHC regarding mortgage insurance underwriting requirements has caused concern, Toronto Dominion has announced that TD Conventional Lending Policies as well as TD High Ratio Mortgage policies insured by Genworth Canada and Canada Guaranty remain unchanged.

What exactly does this mean and how does it affect you as a borrower? First off, it means that any applications that do not meet the CMHC’s new underwriting guidelines will automatically be routed to one of the other High Ratio Mortgage insurers. Both Canada Guaranty and Genworth Canada have made it quite clear that they are comfortable with their current underwriting policies. So, anyone who needs to have an insured mortgage and qualifies will find the required mortgage insurance.

To summarize, the borrower has nothing to do and the lender will take care of routing the application to the appropriate insurer – what they did anyhow as while brokers can request an insurer the choice of insurer is generally up to the lender. Most important of all, these changes will have no impact on application acceptance, amount that can be borrowed or the timing of a purchase.

It has been noted that by many in the industry that CMHC has a more pessimistic outlook on the economy than the majority of the financial industry and fortunately for borrowers Genworth Canada and Canada Guaranty do not share the same outlook.

Dave Larock has written an excellent post about the hidden costs sometimes found in the fine print of mortgages.  In mortgages, and life insurance, there is a price to any ”deal” that you find.

”There is an annual tradition in the Canadian mortgage market whereby a large bank grabs the headlines with an eye-catching rate as soon as our spring real-estate markets kick into high gear.”Read the post here.

Robert Kelly past chair of Canada Mortgage and Housing Corporation talks with BNN.  Housing prices will respond to the unemployment rate.