Almost 1 million people who took out a mortgage in 1996 may end up paying pounds 13bn more than they should over the same 25-year period, the bank said.
For an average pounds 51,000 repayment loan on which interest is charged each year, a home-owner would overpay more than pounds 13,500 in interest costs over 25 years. The overpayments are because most lenders offer mortgages on which interest is calculated in arrears each year. No account is taken of payments credited in the previous 12 months.
Chris Herbert, head of marketing and customer services at Yorkshire Bank, said: "Lenders which follow this practice alone are effectively receiving a 12-month interest-free loan each year from their customers and are really only acting in their own self-interest."
Yorkshire Bank, which is owned by National Australia Bank, has calculated the cost of a pounds 50,000 repayment mortgage, where other lenders charge annual interest while it deducts it on a daily basis. Whereas a standard repayment mortgage would take 25 years to pay off the loan, the same level of payments with Yorkshire Bank would see the loan met in just over 20 years.
A Halifax spokeswoman said: "We explain to our borrowers exactly how interest is charged on the loans they take out and do not believe we are hiding anything from them."