Canada’s fiscal policymakers are working to cool off the country’s overheated real estate market, tightening lending restrictions and warning buyers about the dangers of excessive debt.

But maybe someone should tell the country’s independent mortgage lenders. They’re working overtime against the government’s policies, engaging in a mortgage rate war that on the one hand could make homeownership more affordable for many Canadians, but but on the other hand scuttles efforts to cool down the housing market before it overheats to the point of collapse.

According to mortgage blog RateSupermarket.ca, you can now get a five-year fixed mortgage for as little as 2.88 per cent interest -- an all-time low for a mortgage rate in Canada, so far as Huffington Post Canada can tell. The offer comes from Advent Mortgage Services, a Toronto-area company that offers mortgages in Ontario, the Northwest Territories and the Yukon.

This is the third week in a row that Canada has seen a new record-low interest rate. The record low was 2.89 per cent last week -- an offer from True North Mortgage -- and 2.94 per cent for a five-year fixed mortgage two weeks ago.

Just a few months ago, it was the large banks who were falling over each other to offer the lowest rates. The Bank of Montreal dropped its rate for a five-year fixed mortgage to 2.99 per cent in January, then an all-time low, spurring other banks to follow temporarily.

The mortgage battle heated up again in March, when all five of the country’s biggest banks temporarily dropped rates to somewhere around 2.99 per cent.

But this time around, the big banks are staying out of the fight, and attention is turning to the country’s small, independent mortgage brokers.

“Interestingly, we still haven’t seen major banks publicly announce aggressive pricing,” Canadian Mortgage Trends editor Rob McLister wrote in an email, as quoted at Postmedia. “You still have the majors advertising five-year rates like 3.94 per cent or 3.99 per cent.”

Perhaps the big banks are listening to Finance Minister Jim Flaherty, who reportedly went directly to the banks and asked them to stop engaging in mortgage discounts.

Flaherty, like many other policymakers, has expressed concerns about Canada’s real estate market, and recently tightened rules on mortgage lending. Mortgages insured by the CMHC are now limited to 25-year amortization periods, down from 30 years, and home equity loans can amount to no more than 80 per cent of the value of the house, down from 85 per cent.

It was the fourth tightening of mortgage rules in as many years, and a sign the government is aggressively working to cool off what it sees as an overheated market.

Or maybe the big banks are listening to the credit rating agencies that determine their borrowing costs. Standard & Poor’s issued a warning on seven Canadian financial institutions on Friday, including the big five banks, arguing that house prices are overpriced and Canadian consumers’ debt levels too high.

Whatever the reasons, the battle for mortgage customers appears to have shifted to the small, independent lenders, some of whom are seeing their business boom.

First National Financial Services, for example, completed $4.4 billion of new mortgages in the second quarter of 2012 -- a jump of 50 per cent, reports the Globe and Mail.

Despite the tighter mortgage rules, lenders are finding it easier to offer low rates because yields are falling in the bond markets, making it cheaper to finance loans, the Globe reported.

The explosion of a rate war among small lenders is certain to raise concerns among critics who fear that Canada’s real estate market is beginning to resemble the subprime mortgage mess in the U.S., where homeowners found themselves saddled with loans larger than the value of their homes when real estate prices dropped.

A report in the Globe and Mail several years ago pointed out that private lenders have played a major role in the development of Canada’s subprime mortgages (which account for a much smaller share of the overall mortgage market than subprime loans did in the U.S. before the housing crash.)

“More startling is that more than half the foreclosures in 2008 were initiated by a mish-mash of subprime lenders who targeted riskier borrowers with tarnished credit histories,” the Globe reported. “The numbers tell a story of thousands of homeowners who borrowed more than they could afford from lenders who lent too readily.”

Also on HuffPost:

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