Regulator tells lenders to return 'hidden' interest on bridging loans

Borrowers hit with high interest rates for short-term bridging loans may get some of their cash back after lenders were told charges were "unclear, unfair and misleading".

The Financial Services Authority said some lenders had failed to explain interest charges properly and quoted lower monthly rates than people actually paid. As a result it has told lenders to pay back this hidden interest to those who took short-term loans, usually to bridge the gap between buying a home and selling their old one or for buying a property at auction. The compensation bill could run into the millions.

An FSA spokesman said: "We are worried that these calculations produce an interest rate that is unclear, unfair and misleading and are therefore likely to result in consumer detriment. We want firms to take steps to identify where they are in breach and implement changes."

Robert Sinclair, who heads the Association of Mortgage Intermediaries, said people who thought they might be affected should get in touch with the lender directly. "Where a lender has added the interest to the loan, customers may be entitled to a refund of some of the interest. This is the FSA exercising its powers to protect consumers."

The potential windfall applies to people who took a regulated short-term loan on their main home from a regulated lender.