The Council of Mortgage Lenders (CML) has questioned the wisdom of the FSA’s attitude to interest-only mortgages.

The FSA is concerned that existing mortgage customers without a stated or proven repayment method pose a potential prudential risk for individual lenders if a large number of borrowers do not, in fact, pay off their loan at the end of the term, as planned.

The FSA has a separate, but related, regulatory concern that some consumers have taken on unaffordable mortgages without a realistic repayment method or plan, and there is a drive to ensure that these borrowers should address this situation sooner rather than later.

The regulator is also seeking to tighten up the broader mortgage rules on assessing the affordability of loans, so its new approach may also affect future interest-only mortgage sales to each of the categories or borrower identified above.

These potential systemic issues have, in fact, been under review within the industry – by the CML with members – since the spring. It will be reporting its conclusions shortly.

In the interim, however, the FSA, in its July consultation paper on responsible lending, has declared its intention to launch a debate about the future regulation of interest-only mortgages. The FSA says that its aim under the mortgage market review is to create “a flexible market that works better for consumers.”” But its likely approach to interest-only mortgages will have the opposite outcome for many of the above customer groups