Halifax is set to pay £500m in compensation after it admitted confusing 600,000 customers about whether a cap on its standard variable rate mortgage applied to them.
The lender has reached a voluntary agreement with the Financial Services Authority to pay the redress because wording in its mortgage offer documents had the potential to cause confusion.
The issue affects people who took out a mortgage between September 20, 2004, and September 16, 2007, and relates to the group's decision to increase the cap on its standard variable rate mortgage from 2pc above the Bank of England base rate to 3pc above it.
The problem relates to the wording in the offer letter that was sent to people taking out a mortgage during this period, which may have made customers think Halifax would contact them if it was increasing the cap on its SVR.
But in reality the group only had to contact customers who were paying the SVR on part of their mortgage, but also had another loan with the group which carried early redemption charges.
Although customers would have been informed that their mortgage repayments were changing, Halifax did not make it clear that part of the reason for this was because it was increasing the SVR cap by 1pc.
The issue was made more confusing by the fact that the Bank of England base rate was failing rapidly during the period in which the cap was changed, meaning the amount people on SVRs were paying was changing on a monthly basis.
Halifax, which is part of taxpayer-backed Lloyds Banking Group, will begin writing to the 600,000 customers affected from April.
It expects to make payments to around 300,000 of these people.
The money individuals will receive will be based on the difference between repayments if the SVR had been 2pc above base rate and the 3pc above base rate that it was charged at.
Lloyds Banking Group said: "Halifax is committed to operating with the highest levels of integrity and treating customers fairly and felt that a proactive co-ordinated programme to contact affected customers and make goodwill payments was the appropriate course of action."