* BoE toughens mortgage affordability tests, lending rules
* Only 15 pct of new UK mortgages to exceed 4.5 LTI ratio
* Carney says measures will not affect rate rise plans
* GRAPHIC: House prices vs earnings link.reuters.com/fyg34s
(Writes through, adds bank and analyst reaction)
By Ana Nicolaci da Costa and Huw Jones
LONDON, June 26 The Bank of England imposed its
first limits on how much most people can borrow to buy a home on
Thursday, in a bid to stem increasing levels of debt and rapidly
rising house prices.
The move makes Britain the biggest economy to date to impose
mortgage lending curbs as it tries to stop a repeat of the type
of housing bubble seen in the United States and other countries
before a 2007 bust that triggered the global financial crisis.
Immediate questions were raised as to whether the measures
were tough enough, however, and shares in housebuilders jumped
more than 5 percent on relief the moves were not more stringent.
Some form of action to cool double-digit price growth in the
housing market had been widely anticipated, and the Bank said
more would be done if Thursday's moves prove insufficient.
Sterling rose towards a six-year high on the prospect that
the central bank will ultimately have to raise interest rates.
The BoE's Financial Policy Committee said that from October,
it would only allow 15 percent of new mortgages to be at
multiples higher than 4.5 times a borrower's income, and that
all lending would be subject to extra affordability checks.
"(These steps) will prevent lending getting too far ahead of
income growth and they'll prevent a slide into riskier lending
and higher indebtedness that could undermine the economic
expansion," BoE Governor Mark Carney told a news conference
presenting the measures.
Britain's housing market has rebounded sharply following the
financial crisis, thanks to record-low interest rates, falling
unemployment and government-sponsored credit schemes.
But policymakers have become increasingly concerned about
momentum in the housing market, with prices growing at around 10
percent annually in Britain and at nearly double that rate in
London, where cash buyers from abroad are also fuelling demand.
Late last year the BoE made mortgage lending ineligible for
a loan subsidy scheme. Revamped affordability tests which came
into effect in April are also starting to drag on lending.
But the British Bankers' Association said the new loan cap
would not have a big impact on its members' current lending,
though it could limit future house price growth.
Around 10 percent of current lending is at a loan-to-income
ratio above 4.5. That rises to around 20 percent in London, but
few lenders focus just on the capital so most can offset
higher-risk lending there with less risky lending elsewhere.
"I don't think it will bite on the economy in the short term
but it's a backstop that's been put in place," said BBA chief
economist Richard Woolhouse.
LITTLE IMMEDIATE EFFECT
Carney described the measures as a "firebreak" which he did
not expect to have a significant impact until next year and
which were designed to allow weak wage growth to catch up with
past house price rises.
"If that wage growth doesn't come through ... the cap would
bite more quickly and it would (have) consequences for prices."
He stressed that it was debt levels not price rises that
were the main target of the measures imposed by the BoE's
watchdog on financial stability. "We don't target house prices.
The question is indebtedness."
He said the measures would not affect the central bank's
decisions on interest rates, which many in the markets think
will start to rise by the end of the year.
"They're less likely to have implications for the path of
monetary policy which currently anticipates limited and gradual
rate rises over the forecast horizon," Carney said.
British government bond prices fell after this comment and
expectations for an early rate rise increased slightly.
"There were some people in the market either expecting
measures that were a little tougher, or who had thought that by
implementing the FPC measures the (BoE) could afford to take its
time in assessing ... rates," said Marc Ostwald, strategist at
The Bank's move comes less than two weeks after finance
minister George Osborne said he would give the BoE full legal
powers to limit mortgage lending, something seen as giving the
central bank political cover to impose tougher measures.
The latest steps are unlikely to limit many people's ability
to buy a home in the run-up to a national election in May 2015.
Osborne welcomed the new rules, and said no loans under the
government's Help to Buy scheme - which guarantees high
loan-to-value mortgages - would be issued at an LTI ratio above
Fewer than 5 percent of Help to Buy mortgages currently are
issued for ratios above 4.5.
Carney has stressed in the past that the only way ultimately
to improve stretched housing affordability in Britain is to
build more homes - something the opposition Labour Party has
criticised Osborne's Conservative coalition for failing to do.
He has also said the Bank has no power to stop the cash buyers
helping to fuel sharp price rises, especially in London.
The FPC also recommended that affordability tests introduced
in April should be toughened. Borrowers will from Thursday have
to show they can repay the home loan even if interest rates rise
3 percent, compared with at least 1 percent previously.
Carney said the FPC was ready to take further steps if
lenders appeared to be breaking the spirit of the rules and
allowing credit standards to deteriorate.
"This is the limits of our tolerance and that's why there is
a cap in place. We will evaluate, if we need to recalibrate, we
will," Carney said.
But economists judged the measures to be relatively mild.
"The steps announced by the Financial Policy Committee (FPC)
today ... are likely to slow down modestly the housing market
without derailing it," said Christian Schulz, senior economist
at German bank Berenberg.
($1 = 0.5889 British Pounds)
(Writing by David Milliken, additional reporting by Matt
Scuffham, Andy Bruce and UK companies team; Editing by Catherine