The review is aimed at preventing a return to the risky mortgage lending seen in boom times.

It will ensure that customers are subject to a detailed affordability assessment to ensure they can keep up repayments without relying on uncertain future house prices.

The three key features of the review are:

• Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house prices. Lenders should assess affordability.
• This affordability assessment should allow for the possibility interest rates might rise in future; borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever.
• Interest only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.

Income will be verified for every application and applicants must be made aware of the implications, costs and interest rate rises.

Lord Turner, chairman of the FSA, said: “We believe these are common sense proposals which serve the interest of both lenders and borrowers.

“While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.”

The consultation is open for responses until 30 March 2012.