As part of it Mortgage Market Review (MMR) consultation paper, the FSA has proposed that affordability assessments based on capital and interest payments will apply across the board to all mortgage types including interest-only deals.

It said relying on house price inflation or selling the property at the end of the term were not realistic means of repayment for all consumers.

The regulator said that lenders should have to proactively monitor the existence and adequacy of borrowers’ repayment vehicles throughout the life of the mortgage by requiring borrowers to provide evidence on a regular basis. The FSA said this would help mitigate potential lender losses.

Its research found that at the peak of the mortgage market, interest-only products accounted for 30% of all residential mortgages. The regulator revealed that 1.1m interest-only mortgages with no specified repayment vehicle were originated between Q2 2005 and Q4 2009 and will mature between 2024 and 2033.

It has suggested that using sale of property as an option could be restricted through setting a maximum LTV or minimum level of equity in the property for which the sale of the property is accepted, restricting types of customers that can use the option or requiring lenders to assess the option on a case-by-case basis.

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However, it said that banning sale of property outright as a repayment method for interest-only mortgages could disadvantage borrowers for whom it is a credible option.

In addition, interest-only deals could be restricted to specific customers it would benefit, such as first-time buyers.

The industry has until 30 September 2010 to offer its feedback on the FSA’s proposals for interest-only.