The Bank of England has raised a red flag over the state of the mortgage market, warning lenders that stricter rules could be imposed if they take on too much risk.

The head of the Bank’s Prudential Regulation Authority, which is responsible for stability in the financial sector, said it was “entirely unsurprising” that competition across the mortgage market had forced lenders to take on riskier clients.

“We have seen something of a price war in the mortgage market over the last couple of years,” Sam Woods said. “The response of such lenders has been entirely unsurprising: a material move up the risk curve.”

He added: “We should be watching them like a hawk.”

The models lenders use to measure risk levels may also be skewed by the fact fewer borrowers have recently defaulted on their mortgages while house prices continue to rise. Woods warned stricter minimum capital requirements could be imposed to help avoid the kind of risks that led to the 2008 financial crisis.

“We should approach this trend with a very sceptical eye – particularly given the current stretch in some measures of house price valuation,” he said.

In a speech delivered on Friday to the Building Societies Association in London, Woods said the Bank was also concerned about leveraged lending, referring to loans offered to highly indebted companies. He said there had been a significant slide in underwriting standards and the overall risk profile was hard to measure.

More complex still are margin loans, which are offered to corporations against their stock holdings, and debt that crosses borders with little oversight.

“We, together with many others, have done a huge amount to make the financial system safer over the last 10 years,” Woods said.

“But the lesson of financial history is that unless we are absolutely vigilant, and keep questioning both firms and ourselves about evolving and emerging developments in the markets we oversee, then this safety can easily slip through our hands.”