The directive, which was agreed in April, will see lenders required to display a second APR on all literature, based on the highest rates offered in the last 20 years.
This will mean lenders will have to display a higher APR figure on advertising for all mortgages which have a fixed rate period of less than five years.
A senior high street lender spokesperson, who did not wish to be named, told Mortgage Solutions that the new rules were likely to cause customer confusion.
“Lenders will have to project what the worst case scenario for a mortgage would be, based on the last 20 years,” they said.
“It will cause absolute confusion amongst customers because it will need to be given equal presence on advertising. Rates quoted will become largely dependent on circumstances which the customer may not experience at all during the life of their mortgage.”
SVRs would be used to calculate the second APR and Council of Mortgage Lenders data shows that rates are currently less than half the level recorded in the late 1990s. The average SVR for mortgages was 8.22% in 1998, compared to 3.43% in 2012, and tracked around 7% for much of the decade.
Alejandro Olmos Marcitllach, assistant to directive rapporteur Mr Sánchez Presedo, said that the APR issue had been subject of much debate as the final text was being agreed.
“We acknowledge the solution is not perfect and it was one of the issues that took more technical discussion,” he said.
“We have seen cases throughout Europe where the APR on variable rate mortgages was misleading because a few years later the number was completely different.”
The final text of the directive will be voted on in the European Parliament later this year, likely to be in September, with the new rules coming into force in 2015.
Ray Boulger, senior technical manager at John Charcol, said that customers already failed to understand what an APR meant and that additional rates would cause even more confusion.
“When giving investment advice you have to say that the past is no guide to the future but the EU is saying that maybe the past is some guide to the future.
“Everybody in the mortgage industry, apart from some regulators in the EU, knows that APRs are grossly misleading in nearly every case.
“If you take someone on a standard two-year fix who has a good, steady job and plenty of equity, there is every expectation that in two years they can do a product transfer or a remortgage. The APR rate is therefore not that material in assessing the mortgage deal.”
Speculation has suggested that lenders could issue a new SVR rate for each new product launched. Some lenders already operate more than one SVR rate for customers.
Existing mortgage providers are also unhappy that a gap in the legislation means new entrants to the market would not be required to display ‘worst case’ APRs because they had no history to base the figure on.
“Established lenders see this as unfair because they are being artificially disadvantaged. A loophole will also exist over new lenders entering the market as they have no historic rates,” the lender said.
Boulger added: “The whole concept of APRs is fatally flawed. I think the fact lenders have to already include one APR on all literature makes it impossible to comply with the FCA’s rule that it should be clear, fair and not misleading. The APR makes it misleading.”
