* Manulife had offered 5-year loan at 2.89 pct
* Finance minister has warned banks to curb risky lending
* High debt levels have raised worries of housing crash
By Cameron French
TORONTO, March 19 Manulife Financial said on Tuesday it is reversing a decision to cut Canadian mortgage rates following pressure from Finance Minister Jim Flaherty, who has raised concerns about record high consumer debt levels.
Manulife, which is Canada's largest insurer but also offers banking services such as mortgages, said this week it would offer five-year loans at 2.89 percent, down from its previous 3.09 percent and lower than the posted rates of any of Canada's top five banks.
But the company said on Tuesday it is pulling the low-rate loans.
"After consulting with the Department of Finance, Manulife Bank has withdrawn the promotional campaign and reverted to our previous posted rate," Manulife spokesman Graeme Harris said in an emailed statement.
Canada's Conservative government has tightened mortgage lending rules several times in an effort to cool higher-risk lending and reduce the chances of a U.S.-style housing market crash.
Earlier this month, Flaherty warned the country's banks not to engage in the kind of risky lending that led to the U.S. housing crisis, after Bank of Montreal cut a popular mortgage rate to a near-record low.
"The minister felt that it was intolerable that Manulife would make this change and he instructed one of his staff to call up and pass along the message that it would not be tolerated," said a spokesman in Flaherty's office.
Canadian housing sales have slowed following the last round of mortgage rule changes in July.
But prices have remained high as low interest rates have allowed lenders to offer mortgages at historically low levels. At the same time, Canadian household debt-to-income levels are at a record high.
"(Flaherty) has made it very clear that he is concerned about extremely low interest rates, and he wants to make sure that the downward trend in housing (activity) continues at a rate that is reasonable," said Benjamin Tal, senior economist at CIBC World Markets.
While posted rates are the lowest widely advertised by lenders, borrowers can often negotiate slightly lower rates either through the banks or through brokers.
The moves to curb consumer lending, combined with the tight competition on rates, has pinched revenue growth at Canada's banks. This has put pressure on them to grow market share by keep rates low.
Thomas Mulcair, leader of the New Democratic Party, the biggest opposition party, and other opposition party leaders criticized Flaherty's intervention, saying that Manulife was simply responding to market pressures.
"This idea that you use the office of a minister to dictate outside of law, outside of regulations, is absolutely unacceptable in a free and democratic society."
The mortgage rate cuts come just ahead of the typically busy spring real estate buying season, when warmer weather prompts sellers to list houses they had been holding off the market during the winter months.