A City watchdog has issued a warning over unaffordable home loans after a number of mortgage firms were found to have breached financial regulations.

The Financial Services Authority told consumers to be aware after a review of more than 345 mortgage brokers across the country revealed many were offering home loans on unaffordable terms.

Seven have been referred to the regulator's Enforcement division, while a number are still being considered for referral and others have been forced to review their policies.

The FSA reviewed brokers that offer self-certification mortgages, which allows people who cannot prove their income to arrange loans for their homes.

The watchdog said that while some brokers were meeting legal requirements and treating consumers fairly, several operated "well below" the acceptable standard.

It also warned that firms need to improve the self-certification process by better assessing if people can actually afford a mortgage and whether their stated incomes are plausible.

Stephen Bland, FSA retail intermediary sector leader, said: "During the reviews we saw a number of good brokers who are meeting the required standards and they are being undermined by the negligence or wilful non-compliance of others.

"We also saw some who despite having some way to go, were willing to engage with us and be helped to improve their performance, which is why we are providing so much guidance following these reviews.

"However, there are still an unacceptable number of firms unwilling to change and they are damaging the rest of the industry."

The Council of Mortgage Lenders, which represents lenders across the UK, said it supported actions the FSA is taking against lenders which it said were damaging the reputation of the mortgage industry.

CML director general Michael Coogan said: "After three years of regulation, the FSA is right to expect its regulatory standards to be in place across the whole market. These findings are a wake-up call to those brokers who are behind the pace.

"But the FSA also needs to make sure that it sets out its expectations clearly and unambiguously, which does not always happen. This is particularly important for small broking firms."

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