The FSA is not to ban interest-only mortgages, having published its final rules of the Mortgage Market Review (MMR).

Many had feared the regulator would seek to prohibit non-repayment mortgages.

However, interest-only has already become a niche product after many major lenders withdrew from offering such products.

Richard Sexton, director of e.surv chartered surveyors, said: “There isn’t an easy way to deal with the interest-only legacy. The problem with the FSA’s interest-only proposals is they just close the door after the horse has bolted. They don’t solve the real problem, which is the outstanding balances of existing interest-only mortgages, not assessment criteria for new ones.

“The problem built up in the mid-to-late 2000s, when up to a third of all mortgages were interest only. Around three quarters of these have no specified repayment strategy. Worryingly, the FSA has said the assessment of these interest-only mortgages was ‘less robust’. Put simply, swathes of borrowers were granted interest-only mortgages when they couldn’t afford them. Lenders and borrowers were betting that house prices would carry on going up and the balance would be paid off that way. It was a gamble that has badly backfired. Now house prices have fallen sharply, lenders and borrowers are up the proverbial creek without a paddle.

“There are already around £120 billion in interest-only mortgages with no repayment plan to mature by 2020. Most of these mortgages were granted in the mid-to-late 1990s, so don’t even reflect the most dangerous and unsustainable period of interest-only lending in the mid-to-late 2000s. The outstanding balance of mortgages granted just before 2008 will be even higher than £120 billion, and more of the borrowers will be unable to repay the mortgage. Reviewing repayment strategies half way during the mortgage term won’t solve the problem.

“The FSA is saying it’s up to the borrower to find a repayment strategy. That’s a tectonic problem for the market. A big chunk of interest-only borrowers have no means of repaying, particularly the ones who got an interest-only mortgage when the market was basking in the glow of unsustainably easy access to credit just before 2008. Falling house prices have eaten away chunks of equity, and high inflation combined with low savings rates means it will be impossible for lots of borrowers to repay their interest-only mortgage before it matures.

“Today, lenders are much more considered in their approach to interest only lending. There remains a place for it in the market if done responsibly. However, if more lenders pull out from the sector, we may see a domino effect where most major lenders shelve their interest-only products.”