The Bank of England said on Thursday that it would heavily scale back a scheme launched last year to boost mortgage lending, as house price inflation looks set to accelerate further.
Britain's economy has staged an unexpected turnaround since the BoE launched the Funding for Lending Scheme with Britain's finance ministry in July 2012 to help increase lending to home-buyers and businesses.
The scheme will now focus solely on enabling greater lending to small firms that still find it hard to borrow.
"Although the growth in household loan volumes remains modest, activity is picking up and house price inflation appears to be gaining momentum," BoE Governor Mark Carney said in a letter to finance minister George Osborne, who backed the move.
Earlier this week Carney faced questions from lawmakers who are worried that a house price bubble is in the making, and that Britain's economic recovery is hampered by a lack of lending to small firms.
"We should refocus the FLS so that it continues to support lending to the business sector, without adding further broad support to household lending at a time when that is no longer necessary," Carney said in Thursday's letter.
Economic growth in the three months to September was the fastest in three years, banks have far easier access to finance, and house prices are now rising at an annual rate of nearly 7 percent on some measures,above their long-run average.
Most of the increase in house prices is concentrated in London and nearby areas, but Carney said price rises now seem to be spreading more broadly across the country, and that some external forecasters predicted a10 percent rise for 2014.
(Read more: Bank of England sees 'uncertainties' in recovery)
Under the FLS, banks and building societies are able to access cheap credit from the BoE in proportion to how much they increase lending.
On Thursday, the BoE said that increases in lending to households from Jan. 1, 2014 would not entitle banks to access to cheap finance, although existing entitlements would not be affected. Fees charged to banks business finance would be reduced to the lowest point on the existing scale, 0.25 percent.
The BoE also said that favourable capital treatment for new home loans made under the FLS would end on Dec. 31. Five, mainly small, lenders benefit from this at present.
Carney said the changes to the FLS did not have implications for a separate government scheme, Help to Buy, which aims to lift construction and assist home-buyers who lack large mortgage deposits, and which the BoE will review next September.
(Read more: Bubble trouble?Experts clash over UK housing)
The BoE also signalled that it was ready to take further action to cool housing if need be, including recommending a cap on how big mortgages can be relative to property values and borrowers' salaries.
Currently the BoE lacks the power to force banks to follow its recommendations on such caps, but it could instead require banks to hold extra capital against risky lending - another option that it outlined.
Away from Britain's housing market, the BoE said a stronger economic outlook meant that risks to financial stability appeared lower.
However, risks remained as many countries, firms and individuals were highly indebted and vulnerable if a sharp rise in interest rates outpaced any increase in their incomes.