Bank of England yesterday urged banks to consider the risk of future spikes in interest rates when they approve mortgages, and prepared tools to rein back potentially dangerous lending.

British house prices have risen by around 10 per cent over the past year, and the central bank said mortgages were higher as a share of home-buyers’ income than at any point since 2005, although other indicators remained weaker than average.

Some commentators argue that parts of Britain’s housing market are already in a bubble and the BoE’s Financial Policy Committee, which monitors risks to the financial system, said it was keeping a close eye on the sector.

“Given the increasing momentum, the FPC will remain vigilant to emerging vulnerabilities, will continue to monitor conditions closely and will take further proportionate and graduated actions if warranted,” the bank said.

From next month the body that regulates how British banks lend to consumers, the Financial Conduct Authority, will introduce tougher home loan underwriting standards.

The BoE said in a report of a quarterly meeting of its risk watchdog, the Financial Policy Committee, that from June it hoped to have the power to set the interest rate scenarios that lenders would have to consider when granting loans.

The central bank also said that when it conducts its part of EU-wide stress tests for banks this year, it would also make them consider the risk of a sharp rise in interest rates and a big fall in house prices.

The FPC made no new formal recommendations, but it said that concern about financial markets’ readiness for a rise in interest rates was “now at the heart of the FPC’s risk and vulnerability assessments”.