The governor of the Bank of England on Thursday reined in the mortgage market as he sought to prevent five years of ultra-low interest rates and George Osborne's Help to Buy scheme from fuelling a pre-election housing bubble.

Amid concerns that the UK is in the early stages of a new property boom, Mark Carney announced he was refocusing the Funding for Lending (FLS) scheme that gave lenders financial incentives to provide home loans.

The governor said it was "no longer appropriate or necessary for us to have our foot on the accelerator, better to shift into neutral". He said it was time to focus FLS on small businesses. The decision had been taken with the chancellor, he said.

"By acting now in a graduated fashion, authorities are reducing the likelihood that larger interventions will be needed later," Carney said. The governor stressed that the housing market is not an immediate risk to financial stability. But he admitted that financial policymakers were concerned about the "prospective evolution" of the market amid forecasts of a 10% rise in house prices next year on top of a near-7% increase in the past 12 months.

The TUC said the move would "hit the feelgood factor" Osborne has been trying to create before the 2015 general election and prompted speculation that the move to end a key part of the FLS had been taken reluctantly by the chancellor. Osborne said: "Now the housing market is starting to pick up, it is right we focus the scheme's firepower on small businesses. Small firms are the lifeblood of our economy."

Some economists were sceptical that the withdrawal of the FLS would have a major impact. Others warned it could spell the end of the low mortgage rates that customers have enjoyed and that are said to be helping to propel house prices higher.

More than £1bn was wiped off the value of housebuilders after Carney's remarks – Barratt Developments fell almost 10% and Persimmon 6% – on fears that ending FLS might backfire. Sterling rose on expectations of interest-rate rises, although economist James Knightly at City bank ING said the aim of the policymakers was to have the opposite effect.

The FLS provided an immediate boost to mortgage lending when it launched in August 2012 and has since been supplemented by the chancellor's Help to Buy scheme, which offers subsidised home loans up to £600,000.

Help to Buy will be unaffected by the package of measures announced by the Bank of England on Thursday. Other changes designed to keep a close watch on the housing market include imposing tougher "affordability" tests on consumers before they are granted home loans and ensuring that annual financial health checks on banks include the impact of major shocks in the housing market.

The surprise move to refocus FLS means that until the scheme ends, in January 2015, it will now be used only for business loans. The FLS for home loans will end a year earlier than planned, in January 2014.

Cathy Jamieson, shadow financial secretary to the Treasury, said: "We called for the (FLS) to prioritise lending to business, and, after three wasted years when net lending to firms has fallen, the government is belatedly acting. But homeowners facing a cost-of-living crisis will want reassurance from ministers that suddenly taking the scheme away from mortgage lending won't see a rise in mortgage rates."

Business secretary Vince Cable said the changes to FLS were "sensible and welcome", adding: "It is critical it supports growth in the productive economy, rather than simply stoke the housing market."

In a letter to Osborne, Carney said: "Although the growth in household loan volumes remains modest, activity is picking up and house price momentum appears to be gaining momentum."

But there were no changes to the Help to Buy scheme, which the Bank will assess annually from 2014. In Thursday's half-yearly check on the risks to financial stability, the Bank said activity in the housing market remains below long-term trends.

The Bank's financial stability review spelled out the impact that rate rises could have on the most vulnerable households, who have taken on mortgages at high multiples of their incomes and over periods of more than 25 years.

The Bank of England said it was putting "several actions in train that will guard against a build-up in vulnerabilities". New mortgage affordability tests will be introduced from April 2014.

Frances O'Grady, general secretary of the TUC, said: "This is good news for the real economy, but bad news for the chancellor. The Bank of England is clearly worried that the economic recovery is based on consumers borrowing on the back of rising house prices rather than business investment and rising exports.

"Ensuring that Funding for Lending works to boost business investment is a sensible policy that can drive sustainable growth and help build a new economy. But stopping over-excitement in the property market may hit the feelgood factor that the chancellor is hoping will distract from the failure of government policy to rebalance the economy."

The Bank said a key risk to financial stability could be caused by an abrupt rise in long-term interest rates, and the Financial Conduct Authority is working with banks and other firms to ensure they are prepared for this risk. Public sector indebtedness has also risen since the crisis and some households remain vulnerable. "Financial stability risks remain, including from the high indebtedness of some sovereigns, corporates and households. These vulnerabilities have been kept in check by low interest rates and other policy interventions," the financial stability report said.