Yorkshire Bank and Clydesdale Bank is to pay more than £20m to 42,500 mortgage borrowers it has been deemed to have treated unfairly.

The total cost of redress, including the Financial Conduct Authority fine, is expected to cost the bank more than £42m.

In April 2009, Yorkahire/Clydesdale realised that it had been miscalculating the repayments for 44,500 variable rate mortgage borrowers, due to a computer error. As a result, 22,000 borrowers were left with a shortfall. In some instances the undercharging dated back to 2005.

The bank asked the borrowers involved to make good the difference on their homeloans.

According to the FCA, Yorkshire/Clydesdale did not inform its mortgage customers clearly of their rights after miscalculations came to light.

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Yorkshire/Clydesdale has agreed to compensate all those who underpaid on their mortgages as a result and write to other affected customers. The bank said it had “voluntarily agreed to take action that will go over and above that required by the FCA”.

David Thorburn, chief executive, said:

“I am very sorry that this wasn’t handled as it should have been. We should have made it clear at the time that this was entirely our fault and that some customers may be entitled to compensation.

“Where our error resulted in a capital shortfall on a customer mortgage, the Bank will write off the entire shortfall, make a payment representing interest costs and recalculate the reduced payment amount where appropriate.

“The average shortfall to be written off is £970. In total, there was a £21.2m shortfall in customer mortgages.”

Tracey McDermott, director of enforcement and financial crime at the FCA, said:

“For most people mortgage payments are their biggest monthly outgoing and we all budget on the assumption that the information our mortgage lender gives us about what we need to pay is correct.

“Here Clydesdale failed in that basic duty and, when it discovered the problem, sought to pass all of the consequences on to its customers – expecting them to find the money to remedy mistakes which were entirely of Clydesdale’s making.

“Firms must put the interests of customers at the heart of their business if we are to restore trust and confidence in financial services. Clydesdale is today paying the price for its decision to put its bottom line ahead of the need to ensure its customers were treated fairly.””