The Chancellor of the Exchequer has responded to warnings that the second part of his Help to Buy programme could encourage risky lending and irresponsible borrowing and cause a bubble in house prices.

He has said lenders will have prove that they carried out an affordability at the point where borrowers make an application for a mortgage linked to Help to Buy 2;  all mortgages will need to be stress checked to ensure that borrowers could still afford the repayments at much higher interest rates, and lenders will have to verify every borrower’s income.

Lenders will also have to demonstrate borrowers have no history of credit management problems.

Osborne suggests the taxpayer will also be protected by other lender-focused conduct rules.

The government has outlined nine different Loan to Value (LTV) bands, broken down into 80-85%, 85-90% and 90-95%, split down further into purchase and remortgage brackets. If a lender plans to lend in any of the nine high LTV bands outlined under the scheme, all mortgage lending at that LTV band must be Help to Buy.

Osborne said this way, lenders cannot only use the scheme for their riskiest loans.

So far both Halifax and RBS/NatWest have launched at a single band of 95% LTV for Help to Buy, limiting lending exposure to the scheme at a higher LTV.

Osborne has also asked the Financial Policy Committee (FPC) to monitor and invigilate the scheme from September 2014 and raise the alarm if the market begins to overheat.

At that time, the FPC will also advise on whether the house price cap of £600,000 cuurently applied to the scheme is still appropriate.