The deal will bring closer a new EU wide set of standards for mortgage consumers as well as for banks and credit institutions.
The European Commission has hailed the agreement as heralding greater protection and transparency for consumers.
It added that tougher credit worthiness assessments across the EU would lower the risk of housing booms and busts.
“It will create the framework for a European-wide mortgage market enabling operators to finally be able to take full advantage of the Single Market and its 500 million consumers thanks to a European passport.”
Under the new directive consumers will receive a standardized information sheet (ESIS) that will allow them to shop around to identify the best credit offer for their needs, but will also be alerted to the risks such as those relating to variable rate loans and foreign currency loans.
There will be measures against misleading advertising, as well as rules to prevent lenders taking excessive risk in providing mortgages in order to secure bonuses or commission.
Staff in credit institutions will have to meet performance standards so that potential borrowers will be fully aware of their rights and obligations at the pre-contractual stage.
Borrowers will be guaranteed a period of reflection, or period of withdrawal, before being bound by a contract.
Banks and credit institutions will also have to show “reasonable forbearance” when dealing with borrowers who are experiencing serious difficulty in making repayments.
These principles will, however, only apply to mortgages issued after the directive comes into force, which is expected to be in the middle of 2015.
Minister for Finance Michael Noonan welcomed the agreement.
“We have seen in Ireland how practices in relation to mortgage credit have contributed to the crisis in the financial system. The new rules agreed today will give consumers much better information about mortgage applications and offers.
“This is another important result for the Irish Presidency on financial services, contributing to our overall aim of enhancing consumer protection.”