In the Mortgage Market Review (MMR) consultation paper, the FSA said the loans cap would be aimed at reducing the likelihood of borrowers having difficulty repaying their mortgage.
A 20% loans buffer would mean that a borrower with impaired credit who was assessed to be able to afford monthly mortgage payments of £1000 would only be able to take out a mortgage with monthly payments of £800.
However, the FSA added that where credit-impaired borrowers are able to demonstrate that they can manage their finances, their credit history will be restored allowing them access to mortgages without restriction.
The FSA has urged the industry to offer its views on the issue, how such a buffer should be set and at what level.
The market has until 16 November 2010 to give its feedback.
