Britain's biggest home loan provider said it was trying to address "inflationary pressures" in the city - where prices have risen 17% in a year compared to rises of just 0.8% in Scotland.
Under the plans, Lloyds, one quarter owned by the taxpayer, will limit mortgages of more than £500,000 to four times income.
Controversially, despite the bank's admission it wants to ease house price rises only in London, the policy will apply in every part of the UK.
The change was announced just hours after new figures showed house prices across the UK have risen by an average of 8% in the space of a year. But the statistic masks wide variation.
While in London values increased twice as fast as the UK average, a lift of 17.0% over the last 12 months, that figure was just 0.8% in Scotland, 4.9% in Wales and 0.3% in Northern Ireland. Stephen Noakes, group director of mortgages at Lloyds, said that the recovery of the housing market outside London was "fragile" with prices still largely below their peak. He insisted that despite its application across the UK the new restrictions would mainly affect London, because of the £500,000 threshold. "This is a targeted response to an issue largely in the upper tiers of the London housing market," he said.
The policy was designed to manage risks to bank's business and customers, Lloyds said.
But in its statement announcing the changes it also insisted that the problems in London were not being exacerbated by the Coalition Government's flagship Help to Buy scheme, which underwrites part of borrower's mortgages.
Vince Cable, the Lib Dem Business Secretary has raised questions about whether the programme, which has spawned a similar scheme in Scotland, should be scaled back. Yesterday David Cameron indicated that was ready to consider lowering the ceiling for Help to Buy applications, currently £600,000 in London. Shadow Chancellor Ed Balls also echoed a call from Nigel Lawson, the former Conservative Chancellor, to lower that limit.
Lord Lawson said that the whole £12bn scheme should be scrapped within the next year and the ceiling dropped "straight away". Treasury sources said they would not comment on the Lloyds' announcement, which was a "commercial matter for the firm".
But a Treasury spokesman did say: "As the Chancellor has said, we need to remain vigilant about the housing market. The Government has given the Bank of England the tools to do that and they should not hesitate to use those tools if they think it will help with economic stability."