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Queens Drive in the Toronto community of Weston.Tim Fraser/The Globe and Mail

Lenders are driving mortgage rates lower, despite Finance Minister Jim Flaherty's warnings of the impact that low rates could have on consumer debt levels and the housing market.

Manulife Bank has just begun promoting a new five-year fixed mortgage rate of 2.89 per cent, down from 3.09 per cent, about two weeks after Bank of Montreal drew public comment from Finance Minister Jim Flaherty by lowering its advertised five-year rate to 2.99 per cent from 3.09 per cent.

Now, Manulife's move risks again drawing the ire of Ottawa. BMO's rate cut earlier this month prompted Mr. Flaherty to warn the nation's lenders against the dangers of engaging in a mortgage price war, and to take the highly unusual step of praising other banks for not matching BMO's rate.

A spokeswoman for Manulife Financial Corp. said the rate was effective as of Monday for personal Manulife One and Manulife Bank Select mortgages.

"We understand some of our competitors offer lower rates," spokeswoman Laurie Lupton said in an e-mail.

"Manulife Bank agrees with the government that Canadians shouldn't take on more debt than they can handle. However, part of the value proposition we offer to clients is to offer competitive rates," the spokeswoman added.

Banks routinely allow customers and brokers to haggle for prices below their posted or advertised rates, and lower prices than these are available in the market. A number of lenders had been selling five-year fixed mortgages at or below 2.99 per cent when BMO dropped its posted rate. Even posted rates aren't always comparable because the details or fine print on mortgages can differ materially, such as prepayment penalties or the required length of the mortgage or down payment. But, as Mr. Flaherty told reporters earlier this month, "it's also symbolic."

A spokeswoman for the Finance Minister said Monday that his recent comments still stand, and he hopes that banks will "engage in prudent lending."

Mr. Flaherty has long been concerned about overvalued house prices and rising consumer debt levels, worries that caused him to take steps last summer to make it slightly more difficult for borrowers to obtain mortgages. Home sales have dropped significantly since then, but Mr. Flaherty said this month that he continues to be concerned about the residential real estate market. And, while the growth in consumer debt levels appears to be softening, the amount of debt that the average household owes remains at a record high when compared to their after-tax disposable income. In this environment, there are fears that lenders could spur too much borrowing and cause the housing market to rebound too quickly by promoting ultra-low mortgage rates.

Drew Donaldson, a vice-president at mortgage brokerage Safebridge Financial, said he's been able to get his clients 2.89 per cent on a five-year fixed mortgage for about a month, and the same rate from Toronto-Dominion Bank for about two weeks. "They just don't like to over-advertise it because the government kind of slaps their hand," he said.

The price cutting isn't limited to mortgages. Royal Bank of Canada has started advertising home equity lines of credit for 3.5 per cent, which is 0.5 percentage points below other banks.

Mr. Flaherty has said he spoke to Bank of Montreal after its rate reduction. The bank would not comment on that conversation or mortgage rates on Monday. BMO has been trying to boost its mortgage sales ever since it stopped using mortgage brokers about four years ago, but continues to lag major banking rivals.

Similarly, Manulife Bank has been fighting the large banks for business. In 2002, it had assets of just $1.6-billion; at the end of 2012 its assets topped $21-billion.

The decision by Manulife Bank to promote a lower rate comes less than one year after Manulife Financial Corp. CEO Don Guloien said the institution was looking at tightening its lending in response to Mr. Flaherty's concerns about the impact that consumer indebtedness could have on the economy. Manulife Bank is known largely for its Manulife One product that allows consumers to run all of their banking – such as savings, mortgages and other loans – through one account. "We'll take a look at the strategic plan for the bank and probably slow down the growth of it a little bit," Mr. Guloien told The Globe and Mail in an interview in May 2012, reacting to concerns in Ottawa about overextended borrowers.

"Is your mortgage renewing? Are you planning to buy a new home this Spring?" Manulife now asks on its website. "Do you already have a Manulife One account and want to lock in some of your debt? Now's the time to get this great rate of 2.89 per cent."