Stephen Byers, Secretary of State for Trade and Industry (DTI), said the regulations "will put an end to misleading advertising practices".
The reforms implement an EC directive and come in three parts. First, APRs must reflect the total cost of a low-start mortgage over its entire life. For instance, under existing rules a 25-year mortgage with an introductory rate of 4.8 per cent for the first two years only could be advertised as 4.8 per cent APR. This is despite the fact that after two years the rate will switch to the lenders' standard rate (currently 7.2 per cent). Under the new rules the mortgage lender must make it clear that the APR will be 6.9 per cent over the entire period of the loan.
Second, the cost of compulsory payment protection insurance, which is required for most endowment mortgages, must be included in the interest rate calculation. The lack of such a rule has made endowment mortgages seem more attractive.
Third, a standard method of working out the APR must be used by all lenders. Under existing rules, an APR of 9.99 per cent could be expressed as 9.9 per cent. The new rules mean this has to be expressed as 10 per cent. The rules will be implemented from the start of 2000. They were welcomed by both lenders and consumer groups.
Sophie Gumple of the Consumers' Association said: "It's good that this long-running problem is being sorted out. From now on the APR will reflect the total cost of a low-start mortgage loan over its entire life. There will be less confusion in an already confused market."
Michael Coogan, director general of the Council of Mortgage Lenders, said: "This is a helpful move by the DTI to put right the problems that the previous APR regulations have perpetuated for so long."
The Treasury is also expected to announce before Christmas new legislation that will force lenders to scrap their existing voluntary mortgage code in favour of a statutory rulebook run by the Financial Services Authority, the financial regulator.
This would introduce, among other things, an ombudsman scheme for people who take out mortgages of below pounds 25,000.