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By Ana Nicolaci da Costa and Huw Jones
LONDON, June 26 (Reuters) - The Bank of England sought toslam the brakes on Britain's surging housing market on Thursdayby announcing a cap on home loans and tougher checks on whetherborrowers can repay their mortgages.
The Bank's Financial Policy Committee said that fromOctober, it will cap mortgages worth 4.5 times a borrowers'income and that this would apply to 85 percent of total new homeloans.
Britain's housing market has seen a stellar recovery thanksto record-low interest rates, falling unemployment andgovernment-sponsored schemes.
But policymakers have become increasingly concerned aboutthe rapid rise in house prices, which are growing at around 10percent annually in Britain and at nearly double that rate inLondon.
"The FPC does not believe that household indebtedness posesan imminent threat to stability," the FPC, the Bank's riskwatchdog, said in its twice yearly financial stability report.
"But it has agreed that it is prudent to insure against therisk of a marked loosening in underwriting standards and afurther significant rise in the number of highly indebtedhouseholds."
The cap will apply to all banks who lend more than 100million pounds a year.
It will hold a public consultation on the cap. But all newhome loans from Thursday that are completed from October willcount towards the volume of mortgages that will be capped.
The BoE has said it does not aim to curb house pricesdirectly, but instead it is focused on ensuring that lendingdoes not get out of control. It has warned that mortgageconditions appear to be getting more lax.
As such, the FPC also recommended affordability tests introduced in April should be toughened.
Borrowers will from Thursday have to show they can repaythe home loan even if interest rates rise 3 percent, comparedwith at least 1 percent previously.
Interest rates are currently at a record low of 0.5percent, and markets expect it to rise by the end of the year orearly next year.
The Bank of England said the immediate impact of the capwould be minimal since most lenders currently lend within this4.5 limit and are likely to continue to do so. It said themeasure was aimed to be an insurance against a greater momentumin the housing market.
The move is the latest in a series of efforts bypolicymakers to cool the housing sector, which have alreadyweighed on the approval of mortgages in recent months.
The Bank's Prudential Regulation Authority also said thatthe top eight UK banks must maintain a core capital buffer of 7percent, and a leverage ratio of 3 percent.
