The federal government may be ready to take direct aim at Canada’s red-hot housing market, and is actively consulting on a move to increase the minimum down payment required to buy a house, the Financial Post has learned.

Sources say that Ottawa has been studying proposals to increase the minimum down payment from five per cent and said the government is looking at adding restrictions for high-priced housing, which would hit hardest in Canada’s two most expensive cities — Toronto and Vancouver.

“They are definitely looking into this but it doesn’t mean that they will do it,” said one source close to the department, who asked not to be identified. Another source confirmed Ottawa is continuing to look at possibilities for increasing the down payment.

A source with the Department of Finance denied the government is considering any changes to the minimum down payment.

But any inclination to intervene in an already frothy urban housing market can only have intensified after the Bank of Canada announced Wednesday it would lower its benchmark overnight lending rate to 0.5 per cent, leading three major banks to cut consumer rates. Observers have warned that this will only further fuel rising home prices and sales.

Lowering the overnight lending rate is likely to lead in reductions to the prime lending rate used by consumers with floating-rate debt. TD Bank was the first out of the gate Wednesday to lower its prime lending rate, cutting it by 10 basis points to 2.75 per cent. Royal Bank went even lower on Wednesday night, cutting its prime rate to 2.7 per cent. Some financial institutions had already been offering variable-rate loans tied to prime for under two per cent.