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A small sign in the instant teller lobby of a Bank of Montreal branch at Lakeshore Blvd West and Mimico Avenue in Toronto on March 27, 2013 advertises a five-year fixed-rate mortgage of 2.89% for a limited time.Peter Power/The Globe and Mail

A sign in a Toronto Bank of Montreal branch promoting a five-year fixed mortgage rate of 2.89 per cent Wednesday is just one indication that Canada's Finance Minister has his work cut if he wants to stop banks from offering ultra-low rates.

The big banks are generally toeing the line by keeping their posted – or nationally advertised – rates at higher levels after Finance Minister Jim Flaherty scolded lenders over recent rate cuts, fearing they would stoke the housing market. However, bank staff and brokers are competing hard for customers and rates below 3 per cent are now the norm for five-year fixed-rate mortgages. And analysts who cover the sector say that, if anything, rates are likely to fall further.

"I think the balance of risks are to the downside, to lower mortgage rates, unless the government is more active in trying to persuade people not to lower their rates," said National Bank Financial analyst Peter Routledge. "The banks will keep the fiction of the over-three-per-cent mortgage, but you'll walk into a branch and see rates even lower, like 2.75 per cent for example."

That's because the Bank of Canada is expected to keep interest rates low while demand for mortgages has waned since last summer, when Mr. Flaherty took steps to cool the housing market. The number of homes changing hands has declined significantly since then, weighing on the mortgage business.

Mr. Flaherty fears that lenders will re-inflate the market by promoting low rates, spurring borrowers to take on more debt than they should and causing house prices – which many economists believe are overvalued – to rise further.

Last week Manulife Bank announced it was cutting its posted five-year fixed rate to 2.89 per cent, but a phone call from an official in Mr. Flaherty's office saying the move was unacceptable prompted the lender to bring its rate back up to 3.09 per cent one day later. Bank of Montreal dropped its posted rate to 2.99 per cent earlier this month, and did not reverse course after hearing from Mr. Flaherty. But it is allowing the rate to expire this week, and its posted rate will return to 3.09 per cent effective Friday.

Despite the Finance Minister's condemnations, borrowers are able to negotiate with large banks and smaller lenders like Manulife Bank to obtain rates below the posted offer. Canadian mortgage lending has traditionally worked this way, but observers expect competition between banks to heat up behind the scenes as the institutions show more restraint in their official posted rates and advertising.

"Any of the banks, if you pushed them at all you could get 2.89 per cent," said James Laird, the chief operating officer of True North Mortgage.

Banks authorize salespeople to offer discounts based on criteria like the size of the mortgage and the credit-worthiness of the customer. Branch staff are also authorized to escalate mortgage applications to try to obtain rates below the lowest discounted rate in cases where the bank might otherwise lose the business to a rival. And mortgage brokers can receive higher discounts for doing more business with a particular bank, and can sometimes take a cut on their own commission to offer a lower rate.

True North's brokers are currently obtaining 2.89 per cent from Toronto-Dominion Bank, Bank of Nova Scotia and National Bank, and then are agreeing to a commission cut of roughly 30 per cent in order to obtain a 2.79-per-cent rate for customers, Mr. Laird said. "The banks have traditionally been excellent at discriminatory pricing," he said. "What is unique about BMO is that they are yelling at the entire market, or being more transparent, about what a competitive rate would be."

The sign spotted in a BMO branch in Toronto Wednesday morning read "Back by popular demand and for a limited time only, BMO five-year fixed rate closed mortgage at 2.89% APR our best rate." (APR stands for annual percentage rate.)

BMO said the sign has been taken down. "Across our Canadian branch network, the posted special rate on our 25 year-amortization five-year fixed-rate mortgage is 2.99 per cent (rises to 3.09 on March 29), and today we have reminded staff of this," a BMO spokesman said in an e-mailed statement.

Some mortgage brokers laughed at BMO's suggestion that a branch could offer low rates without the bank knowing. Dustan Woodhouse, a mortgage adviser in Vancouver, said branches don't have the power to set interest rates themselves. "They're going to suggest that the branch has the power to knock interest rates down?" he said. "Everything goes through central underwriting."

Bank of Montreal has the smallest mortgage market share of the big five banks and has been working to grow its piece of the pie. When it cut its posted rate to 2.99 per cent for the first time early last year it managed to take a very small amount of business from larger rivals.

David Stafford, managing director at Bank of Nova Scotia said shopping for a mortgage is about more than just the number, since flexibility to pay it down faster is key.

"Everybody is competitive on rates – that's the price of entry," he said. "But some of those offers have a lot of fine print around them. Some are more restrictive on your ability to prepay, change payments, match payments [and] refinance."