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 clean bill of health to Britain's controversial flagship mortgage guarantee 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 arsenal of powers to curb mortgage lending for homes and buy-to-let properties, and said it was bringing forward the date when it would put a figure on the maximum leverage banks can have.

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

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

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

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

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

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

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

He also announced new measures to make cheap homes available to home-buyers aged under 40, as a shortage of affordable housing - particularly in southeast England - is a major public concern.

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

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

NEW POWERS

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

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

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

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

For buy-to-let mortgages - which make up 12 percent of new lending - it will apply an 'interest coverage ratio' to ensure that rental income from the property is comfortably higher than interest payments. Easy access to buy-to-let mortgages for professional investors has been blamed by critics for making it harder for others to buy their own homes.

When the FPC gained its first set of legal powers in April 2013, it was deemed too politically sensitive for the central bank to have the final say on mortgage lending practices.

Since then, BoE Governor Mark Carney has described a further big 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 another regulator, the Financial Conduct Authority, to require lenders to 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 the commercial property market.

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

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