Canada's big banks are lowering their prime lending rates in response to an announcement Friday from Finance Minister Jim Flaherty that the federal government will buy $25 billion worth of mortgage debt to help free up credit markets.

TD Canada Trust and CIBC said it will lower the rate by another 15-hundredths of a point to 4.35 per cent, effective next Tuesday.

"We believe this initiative will be put into effect in a way that will reduce our overall cost of funds and, as a result we are dropping our rate today," Tim Hockey, president and CEO of TD Canada Trust, said Friday.

"Financial markets are very turbulent, and funding costs are still high. However, we anticipate that our cost of funds will decrease with the implementation of this program, and therefore wanted to take action that will benefit our customers directly."

The Bank of Nova Scotia, the Royal and the Bank of Montreal announced shortly afterward that they are cutting their prime rate by 0.25 points to 4.25 per cent.

Canada's big banks were under fire earlier this week after they decided to pass only part of the Bank of Canada's half percentage point rate cut to consumers. The banks said the decision was made because of volatile credit markets.

Speaking in Ottawa Friday, Flaherty said the decision to buy the mortgage debt from Canadian banks was being made in an effort to stabilize the lending industry and encourage lower interest rates.

Flaherty made the announcement before heading to Washington to meet with other G-7 finance ministers to formulate a plan for dealing with the current economic turbulence.

He said the mortgage debt will be purchased by the Canadian Mortgage and Housing Corp.

Flaherty said that will ease pressure on lending institutions and prompt banks to lower their interest rates for Canadians, which could spark renewed buying activity.

He said the plan is "efficient, cost-effective and safe way to support lending in Canada that comes at no fiscal cost to taxpayers."

Don Drummond, chief economist for TD, called the plan "music to my ears" and said it should benefit everyone involved.

"I don't think there's a risk of loss to the government, so it strikes me that those three partners -- the government, the CMHC and the banks all win and that helps ease up to some degree the credit flow in Canada," he told CTV's Canada AM.

Derek Holt, of Scotia Capital, said the move is a "healthy, positive step" designed to make loans available for those who qualify.

"That's the hope, that by taking mortgage backed securities out of the banking system that are illiquid, that they cannot move, cannot sell to the marketplace, and giving cash instead, that banks will then turn around and use that cash to generate more loan growth to businesses and households in Canada," Holt said.

Flaherty maintained the position the Conservatives have taken since the election campaign began -- that the economy is still strong and well protected from U.S.-style economic turbulence brought on my the sub-prime mortgage crunch.

He said Canadian banks and financial institutions are "sound and well-capitalized, and less-leveraged than their international peers."

Not a bailout

Prime Minister Stephen Harper has also sought to reassure Canadians that the economy is stronger than its U.S. counterpart, and will weather the economic storm.

Just yesterday, Harper said the government would not be providing a bailout to banks.

During a campaign stop Friday in Brantford, Ont., Harper said the deal to buy mortgages was an asset swap, not a bailout.

"The government's main concern right now is obviously the cost and availability of credit," Harper said Friday. "Part of what has been happening is, because of the problems in the banking systems around the world, there's less and less inter-bank lending and therefore credit conditions are becoming tight even in Canada.

"...What we're trying to do today is make sure that the banks can take some good assets and turn those into cash so they can make that available to small business, to people seeking mortgages."

The opposition has accused Harper of taking a "do nothing" approach, but he maintains his government has been quietly preparing for the slowdown and shouldn't take drastic reactionary steps now.

Flaherty said the mortgage buyout has been talked about for months.

Meanwhile, Liberal Leader Stephane Dion accused Harper of contradicting his own words about taking action on the economy.

"After months of saying no action was required and his approach was sufficient, it appears, four days before Election Day, Stephen Harper has now had a change of heart," Dion said in a statement Friday.

"It is no surprise that many Canadians will believe that the Conservatives are playing partisan politics with their mortgages and savings in the dying days of a federal election."

Dion said the "11th hour conversion" will not reassure Canadians that Harper understands their needs.

With files from The Canadian Press