More than a million people will struggle to repay their mortgages if an economic slowdown causes banks to continue to toughen their lending criteria, the City watchdog said yesterday.

The Financial Services Authority (FSA) unveiled its sixth annual Financial Risk Outlook as Britain's high street revealed ominous new sales figures and the Land Registry said that house prices had continued to fall.

The regulator identified three risk factors that made a homeowner likely to default — a long mortgage term, high loan-to-value and high loan-to-income. One third of the 5.7 million people who took out a mortgage between April 2005 and September 2007 have at least one risk factor.

At least 18 per cent had two risk factors, making them “a greater cause for concern”, the FSA said. The risk factors are most dangerous when combined with rising interest rates, according to the watchdog.

About 1.4 million mortgagees will see their fixed-rate loans mature this year, causing their repayments to rocket by an average of £210 a month.

The warning came as new figures showed that house prices in December fell by 0.4 per cent compared with November, the first fall recorded since August 2005.

Data from the Land Registry, which bases its information on the actual number of houses sold in the UK, showed that the number of transactions also slumped.

An average of 103,374 homes were sold each month from July to October last year, compared with 117,086 per month from July to October 2006.

A dip in house prices may be good news for prospective home buyers, but new figures show that the proportion of income a buyer needs to save to get on the property ladder has increased by 351 per cent.

A first-time buyer earning £26,595 after tax will now have to save up to the equivalent of 104 per cent of their take-home pay to build up the £27,729 needed for upfront buying costs on a typical home including the deposit, fees and stamp duty, according to the Royal Institute of Chartered Surveyors.

In 1996, they would have had to save up the equivalent of only 23 per cent of their income.

Meanwhile, there was further evidence of a slowdown on the high street as figures showed that the number of retailers reporting an annual rise in sales outnumbered those reporting a loss by the lowest margin for 14 months.

The balance of retailers reporting a rise in January fell to 4 per cent, down from 8 per cent in December.

Howard Archer, chief UK and European economist at Global Insight, said: “Retail sales were particularly soft in January in the durable goods sector, which suggests that the housing market slowdown is having a significant dampening impact.”