UK's Osborne gives Bank of England new powers to cap mortgages

* BoE (Shenzhen: 000725.SZ - news) to have power to set mortgage LTV and LTI caps

* Osborne says housing market not an immediate threat

* Planning changes announced to promote home-building

* Some banks fear new measures may be too crude

* Carney welcomes powers, makes case for early action (Updates with fresh Osborne quote and BoE Governor Carney's comments)

By David Milliken and Ana Nicolaci da Costa (NasdaqGS: ATX - news)

LONDON, June 12 (Reuters) - British finance minister George Osborne said on Thursday that he would give the Bank of England stronger powers to curb mortgage lending and reduce the risks that the housing market poses to financial stability.

British house prices have risen by 11 percent over the past year and are close to pre-crisis levels. The International Monetary Fund urged Britain last week to take steps to cool the housing market and reduce the risk of a bubble.

Osborne said the housing market was not an immediate threat to Britain's financial stability but could become one in future.

"I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market," he said in a speech to London's financial community at the Lord Mayor of London's ornate Mansion House residence.

The central bank will in future be able to stop Britons taking out mortgages that are too big compared with their income or the value of their home, rather than just make suggestions to lenders as it does now.

Osborne also announced changes to planning rules that he said would allow as many as 200,000 homes to be built on former industrial sites in urban areas.

But this may not address the worst housing shortage in southeast England, where local authorities - many of them Conservative-controlled - often oppose new building on open countryside.

The opposition Labour party has criticised the government for not building enough homes since it came to power in 2010, calling on it to introduce more schemes to help homebuilders.

"The danger of the ... failure to act on housing supply is that we see a premature rise in interest rates to rein in the housing market, which ends up hitting millions of families and businesses," said Labour's economy spokesman, Ed Balls.

Osborne's move was welcomed by BoE Governor Mark Carney, who said in a separate speech that the housing market still posed the biggest domestic risk to financial stability.

Carney said signs were appearing that mortgage underwriting standards were becoming more lax - something the BoE had previously said would be a concern if it occurred.

NEW POWERS

The BoE's new powers strengthen the ability of its Financial Policy Committee to curb pressures in the housing market, without raising interest rates.

Some economists said the move could signal the kind of measures the FPC might introduce after next week's meeting, and Carney in his speech made the case for early action as insurance against future risks.

"When we meet later this month, the FPC will weigh carefully ... the merits of graduated and proportionate actions to mitigate the potential vulnerabilities arising from what is the greatest risk to the domestic economy," he said

Caps on loan-to-income and loan-to-value ratios, however, are considered politically sensitive. They could hit first-time buyers, which government schemes have sought to target ahead of next year's elections.

"It certainly gives the BoE a bigger range of options to hone in more selectively on the area of the housing market or mortgage market which is causing problems," said Philip Shaw, an economist at Investec (LSE: INVP.L - news) .

But banking industry sources expressed concern that LTI caps were crude and ignored big differences between borrowers' spending patterns, unlike other, stricter affordability tests introduced by the Financial Conduct Authority in April.

"There is a difference between having a power and deciding whether and when to use it," the Council of Mortgage Lenders said. "In affordability terms, new FCA rules that took effect at the end of April already hardwire in responsible lending."

Osborne said the BoE should not hesitate to act if needed, and noted that loan-to-income ratios were at a new high, although loan-to-value ratios were well below their peak.

The move comes even as recent data has painted a more mixed picture of the housing market. Mortgage approvals have fallen for three consecutive months, while a survey showed earlier house price growth was likely to slow over the next year.

HELP TO BUY

Osborne also defended his Help to Buy scheme, which he began last year and which broadens access to high loan-to-value mortgages, although he said it would not be immune if the BoE did choose to impose loan-to-value or loan-to-income caps.

But the BoE will not be able to use its new powers quite yet. They will need to be turned into law, which Osborne said he would do before the next national election in May 2015.

The FPC also has other tools at its disposal, such as requiring banks to hold more capital against higher-risk loans.

Earlier on Thursday, business minister Vince Cable said he was "concerned" about rising house prices. Previous housing booms showed that mortgage loans of around 3-3.5 times people's incomes were stable, he said, and he was "appalled" to see some banks lending as much as five times income.

"This is the key area that Bank of England has got to operate into and make sure that this boom in house prices, particularly in the south of England, doesn't destabilise the whole economy," Cable told BBC Radio's Today programme.

Lloyds Banking Group and Royal Bank of Scotland (LSE: RBS.L - news) both said recently that for loans over 500,000 pounds ($839,500), they will no longer give mortgages of more than four times a borrower's income. ($1 = 0.5956 British Pounds) (Additional reporting by William James, Steve Slater and Andy Bruce; Editing by Larry King)