Paul Broadhead, head of mortgage policy at the BSA, said that interest-only mortgages were neither inherently bad nor high risk and the industry itself had already set about restricting their availability to suitable customers.

Broadhead said: “There is a real danger that the FSA could introduce over-burdensome regulation that will stifle this market and affect many existing borrowers, including many for whom this is a suitable option.”

He added he was deeply concerned by the FSA’s suggestion that lenders will be made responsible for validating repayment methods at the start of a mortgage term and periodically thereafter.

Broadhead said: “Lenders have a responsibility to make clear to borrowers the risks of interest-only mortgages and to stress the need for a repayment method, but the FSA should avoid creating a moral hazard where customers take less interest in the performance of their finances in the mistaken belief that lenders are doing it for them.”

“Shifting this responsibility to lenders will not help borrowers make well informed and rational decisions, nor will it deliver a flexible mortgage market that works better for consumers,” he said.

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The BSA has voiced its concerns in its response to the FSA’s discussion paper on the potential changes to regulation of interest-only deals.