THOUSANDS of Abbey borrowers who may have unwittingly had their mortgage terms extended by up to 15 years have been warned they are running out of time to seek compensation.

The lender routinely changed mortgage terms when interest rates moved in the 1980s, but the way its loans were calculated was so baffling that customers were often left in the dark.

Many borrowers only realised much later that their terms had been extended, and have had to fork out thousands of pounds more than they expected to clear their mortgages.

The Financial Ombudsman Service (FOS) has ruled that between 1987 and 1993 Abbey failed in its duty to explain that terms could be increased, and borrowers could be entitled to compensation.

Anyone who took out an Abbey repayment loan in the 1980s and early 1990s would have had their mortgage calculated in this way. An estimated 25,000 people a year could have been affected.

The ombudsman has dealt with several hundred Abbey cases and said there could be hundreds more people who have not come forward because they do not realise they could be entitled to compensation. The window for lodging a complaint is likely to expire this year.

The warning comes amid fears that random overcharging is rife in the mortgage industry. In an audit of more than 30 home loans carried out for The Sunday Times this year by Bank Check, an auditing firm, the interest charged on monthly repayments was wrong in all the cases – and always to the customer’s detriment. The lender never lost out.

Devkumar Gadhvi, a retired London Transport worker from Wembley, took out an Abbey repayment mortgage in 1981 with a 25-year term and thought he would pay it off last year.

He was shocked to be told in July 2003 the term had been extended to 2013. Abbey demanded £9,000 to clear the loan.

He embarked on a three-year battle to understand why his term had been extended and has only now received an explanation after the intervention of The Sunday Times.

Abbey said that until 1993 its mortgages did not have fixed terms. When interest rates went up, borrowers could choose to make higher repayments and stick with their original term, or keep their repayment the same and extend the term. When rates fell, they could keep their payments the same and reduce their term or pay a lower rate and stick with the original term.

Gadhvi said he was baffled. “I took out a mortgage with a 25-year term and expected it to stay that way.

“When interest rates change, you expect your repayments to change, but not your term. It was never explained to me that the term was variable and I was completely shocked when the bank turned round in 2003 and said I had another 10 years to go, even though I kept up with all my payments.”

Abbey argued its letters to Gadhvi were clear and that he chose to cut his payments in 1983 by more than interest rates, so his term was extended – but Gadhvi disputes this.

If you had a £100,000 repayment mortgage over 25 years at 6%, the monthly repayments would be £644.30. But if rates rose to 7%, repayments would be £707 and you would pay interest of £112,034 over the term.

However, the way Abbey’s mortgages worked, you would have been able to keep the repayments at about £640 and extend your term, say to 34 years. Over that period, you would pay interest of £162,458 – over £50,400 more than if the monthly payment was increased.

In another case, Terry McDowell, 52, an aerospace engineer from Northern Ireland, was undercharged by Abbey for a £19,000 mortgage taken out in 1982.

The mistake only came to light in 2004 when McDowell received a statement telling him the bank had extended his 25-year mortgage by six years. When he queried this, the bank doubled the repayment figure overnight. Bank Check calculates he is out of pocket by up to £7,000.

Trevor Hillen of Bank Check said: “At best Abbey’s loan system seems designed to be confusing, and in every case we have seen it worked to the detriment of the consumer. No wonder people didn’t know what was going on.”

Abbey, which says its system was common across the industry, has refused to compensate both Gadhvi and McDowell because it says the ombudsman has ruled that its mortgage letters before 1987 were clear. After that date, however, the letters were not clear, so you may be entitled to compensation. The FOS would put you back in the position you would have been in had the term not been extended.

The FOS also said that since October 2004, lenders have had to include information about the mortgage term in statements, so it assumes borrowers should have become aware of any problem from that date. They have three years to complain – giving a deadline of October this year.

Abbey said: “The problem of underfunding received a lot of attention in 2001 but now affects a very small number of people. The ombudsman ruled on this issue in 2001 and we, like other banks, follow his guidance when assessing a customer’s case.

“We clearly communicated to Mr Gadhvi by letter the courses of actions available to him following interest rate changes. At certain times, he chose to keep his payments lower, and we clearly stated the consequences of this.”

If you think you’ve been overcharged, let us know at timesonline.co.uk/moneyweblog