Canadian mortgage rates are in a virtual free fall, dropping to record-setting lows with discount brokers now offering one- to five-year variable rates in the 1.64 to 1.68% range.

But the nearly free money arrives as Canadian mortgage debt is exploding and lenders are dealing with a rush of mortgage payment deferrals due to the COVID-19 pandemic.

The Bank of Canada reports that mortgage credit hit a record high in May, at $1.68 trillion, up 0.6% from April and 6% higher than in May 2019.

Mortgage deferrals, meanwhile, are also soaring. Deferrals topped 743,000 in May at Canada’s six major lenders alone.

At the start of the pandemic, the big six banks—RBC, TD, BMO, Scotiabank, CIBC, and National Bank—announced they would allow customers to defer paying their mortgage for up to six months.

According to the Canadian Bankers Association, deferrals now account for 15% of the mortgages provided at its 13 member banks, which include all the majors.

Most of the deferrals are in Quebec, at 27%, and Alberta, at 26%. Ontario accounted for 21% of mortgage deferrals, with B.C. at just 7%.

With new mortgage applications faltering, lenders have slashed lending rates.

HSBC Canada led the trend early in June when it announced a five-year fixed default-insured mortgage for 1.99%—the lowest rate ever for a five-year fixed at the time. Days later, multiple brokers were offering five-year fixed rates starting at 1.98% and even lower in some cases, with restrictive conditions.

The lowest fixed mortgage rate available as of July 2, according to rate comparison website RateSpy.com, was the one-year fixed at 1.69% for those putting down less than 20% for insured mortgages.

Even the 10-year fixed rate is reaching new lows, currently available nationally for as low as 2.84%.

“Fixed rates are dirt cheap because funding costs keep sliding,” RateSpy founder Rob McLister said. “With a bearish economic report or two, we could slide further into uncharted depths, as soon as next month.”

The lowest nationally available variable floating rate is currently 1.95%, which is prime minus 0.5%, although certain discount brokers are offering rates as low as 1.69% for default-insured mortgages.

As of July 2, intelliMortgage and Butler Mortgage, both based in Ontario, posted a 1.64% rate for one-year fixed-rate products, and a similar record low of 1.68% for their five-year variable-rate offerings.

“Canadians can expect fixed and variable rates to stay at their current historic low until the Canadian and world economy is close to fully recovered,” Ratehub.ca co-founder and CanWise Financial president James Laird said.

The Bank of Canada overnight lending rate remains at 0.25%, and the central bank has hinted it will not go lower.