On Tuesday, the society launched a new deal offering 7 per cent cashback - up to a maximum of £10,000 - on its variable interest rate of 6.1 per cent. Borrowers had to agree to sign up for at least three years, but crucially, the deal allowed penalty-free overpayments of any size.
In theory, this enabled borrowers with equity in their homes to remortgage in order to get a generous windfall, before repaying the extra borrowing straight away. The deal would also have netted them a very low interest rate. Although the society's 6.1 per cent rate was relatively uncompetitive, it was possible to use part of the cashback to reduce the effective rate paid over the three years to a much more attractive 3.77 per cent.
For example, a borrower with a £60,000 mortgage on a £150,000 property could have remortgaged with Lougborough, borrowing 90 per cent of the value - £143,000. Such a loan would generate cashback of £10,000. It would then be possible to use the penalty-free overpayments option to repay £83,000 immediately, reducing the mortgage back to £50,000. Retaining £3,500 of the cashback - 7 per cent of £50,000 - would bring the effective mortgage rate down to 3.77 per cent over three years, leaving a £6,500 profit.
Martin Lewis, of moneysavingexpert.com, said: "Many users on my chat forums applied - the loophole was so valuable that it could have ended up costing Loughborough millions of pounds."
Stephen Peete, chief executive of Loughborough, said: "The honest answer is that we made a mistake, but fortunately, by the time most people spotted the loophole, the £2m we had set aside for this deal had all gone."
Peete said applications received before the mortgage was withdrawn would be honoured. Most borrowers who got the deal intended to use it for a house purchase, rather than a remortgage, he added.Reuse content