The FSA wants to ensure that borrowers have a suitable plan for repaying the capital element of the mortgage and that lenders should be responsible for monitoring that borrowers achieve this.

The CML says: “Potentially, the costs [of checking annually] and regulatory burden [of lenders taking responsibility for the performance of the repayment method] could lead to the withdrawal of interest-only mortgages from the market.”

Many lenders - including Northern Rock, Lloyds Banking Group and Coventry Building Society - have made changes to their interest-only policies recently, and the CML says it is not clear how the proposals will be of benefit.

The CML says: “It is far from clear that the costs and the impact of restricted choice for consumers would be matched by any wider benefits.

“There is clear evidence that the FSA’s approach has already resulted in more restricted availability of interest-only mortgages. Some lenders have announced they will no longer offer them to first-time buyers, or those wanting to borrow more than £500,000.”

The CML adds that the measures will exclude an option from borrowers for whom an interest-only mortgage is an ideal product.

It says: “The FSA’s risk-averse approach will have a major negative impact on product choice for UK consumers and the flexibility of the market to meet the needs of borrowers with different income and employment profiles. In our view, the reforms on interest-only mortgages outlined by the FSA risk excluding an option from particular groups of consumers for whom it is a logical choice, and delivers clear benefits.”