Bank of England backs flagship government mortgage guarantee scheme

* No change to government Help to Buy mortgage scheme

* Banks to be told proposed leverage ratio by end of month

* BoE asks for more powers to rein in home loans, buy-to-let

* Finance minister Osborne welcomes BoE Help to Buy verdict

By David Milliken and Huw Jones

LONDON, Oct 2 (Reuters) - The Bank of England gave a cleanbill of health to Britain's controversial flagship mortgageguarantee scheme on Thursday, sparing the government from potential embarrassment in the run-up to a national election.

The central bank also formally asked to expand its arsenalof powers to curb mortgage lending for homes and buy-to-letproperties, and said it was bringing forward the date when itwould put a figure on the maximum leverage banks can have.

Prime Minister David Cameron announced the Help to Buymortgage guarantee scheme at his Conservative Party's annualconference last year, saying it would aid home-buyers who couldafford mortgage repayments but lacked a large deposit.

The plan was widely criticised by opposition politicians andmany private-sector economists for risking pushing up houseprices, which have since risen by around 10 percent.

However the BoE said Help to Buy was not to blame, as itonly accounted for around 5 percent of mortgages and was mostused in regions where house prices had risen least.

"The scheme does not appear to have been a material driverof (house price) growth - for example, take-up of the scheme hasbeen weak in London where house price growth has beenstrongest," the central bank's Financial Policy Committee said.

Mortgage lending standards had not deteriorated since thelaunch of Help to Buy, and house prices appeared to be coolingsooner than the FPC had expected when it last met in June andimposed caps on general mortgage lending.

The BoE's support is likely to be a small boost for theConservatives in the run-up to a national election in May, inwhich they are trailing the opposition Labour Party by severalpercentage points in the polls.

Cameron had defended Help to Buy on Wednesday at this year'sannual party conference, the last before the election.

He also announced new measures to make cheap homesavailable to home-buyers aged under 40, as a shortage ofaffordable housing - particularly in southeast England - is amajor public concern.

Under Help to Buy, lenders can get insurance from thegovernment to cover the extra risk of lending to someone with adeposit of as little as 5 percent, rather than 20 percent, on ahouse worth up to 600,000 pounds.

Finance minister George Osborne said in a statement onWednesday that he welcomed the FPC's decision.

NEW POWERS

Thursday also saw the FPC formally recommend that it receivethe legal power to cap how big a mortgage Britons can receiverelative to their income and the value of their home.

Finance minister George Osborne said in June that he waswilling to give the BoE this type of power, and on Monday hesaid that he wanted to get them into law before the election.

The BoE's Financial Policy Committee can already recommendloan-to-value and loan-to-income caps on mortgages, and in Juneit urged banks to issue no more than 15 percent of mortgages atloan-to-income ratios above 4.5 times a borrower's income.

On Thursday it said specifically that it wanted its powersto apply to both residential and buy-to-let mortgages. Forresidential mortgages, it wants to be able to cap debt-to-incomeratios - limiting how much banks can lend, taking into accountall a borrower's debts and not just their mortgage.

For buy-to-let mortgages - which make up 12 percent of newlending - it will apply an 'interest coverage ratio' to ensurethat rental income from the property is comfortably higher thaninterest payments. Easy access to buy-to-let mortgages forprofessional investors has been blamed by critics for making itharder for others to buy their own homes.

When the FPC gained its first set of legal powers in April2013, it was deemed too politically sensitive for the centralbank to have the final say on mortgage lending practices.

Since then, BoE Governor Mark Carney has described a furtherbig build-up in mortgage debt - which is already at a high level- as the greatest single threat to a sustainable recovery.

However, housing market activity has shown signs of cooling,in the wake of June's measures and separate steps by anotherregulator, the Financial Conduct Authority, to require lendersto apply tougher affordability rules when issuing mortgages.

The FPC said that the housing market remained a risk,despite signs of slowing activity and a recovery in thecommercial property market.

The FPC also said it would propose a numerical figure forhow much banks can lend relative to their capital by the end ofthis month. Previously the FPC had said it would only give abroad framework for the leverage ratio.

In addition, it said that British-based banks with exposureto Norway or Sweden would have to abide by those countries'recent requirement for them to hold an extra buffer of 1 percentof capital to protect against swings in the economy.