West Bromwich Building Society is set to plunge into the red after it lost a Court of Appeal case against interest rate rises it imposed on its buy-to-let mortgages.
The case centres on mortgages issued up to 2008 to around 6,500 investors and landlords with three or more properties.
Landlords said they had been issued the loans by subsidiary West Bromwich Mortgage Company on the basis that their interest rates would track the Bank of England's base rate which has remained at 0.5 per cent since March 2009.
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However, the terms and conditions of these buy-to-let mortgages contained a clause which, under certain circumstances, enabled the lender to change the mortgage interest rate to something more in line with the current market norm.
Property 118 Action Group, which represented a group of around 400 of the affected landlords and investors, complained about the rise in interest rates on the mortgages after it was imposed in September 2013.
The society said that, in response to the "unprecedented reduction" in interest rates over recent years and the increased relative cost in providing these loans, it had to protect the best interests of members and therefore could not ignore this clause.
Savers, who represent the vast majority of the society's members, had suffered a dramatic fall in income due to lower interest rates, it said.
Property 118 Action Group took its case to the commercial division of the High Court in 2015 where the judge ruled in favour of the West Bromwich but also allowed the action group leave to appeal.
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This has led to today's announcement by the Court of Appeal which said the relevant clause was inapplicable in these cases, overturning the High Court's decision.
West Bromwich Building Society has set aside a £27.5 million pot to reimburse all of the affected landlords, including those not involved in the action, with any additional interest charged which is expected to cause a pre-tax loss for 2016/17.
Chief executive Jonathan Westhoff told the Post : "We're comfortable with the course of action we took, given our prime responsibility to look after our members.
"We felt it was the right thing to do. We could not ignore the clause given it was an opportunity to improve the society and its members."
Listed West Bromwich Building Society no longer offers buy-to-let mortgages but continues to honour and administer those mortgages involved in this court action.
A statement posted on the Property 118 website said: This ruling sends a clear message to other lenders who have acted in a similar manner and to those who might have been considering following suit.
"There are thought to be in the region of one million tracker buy-to-let mortgages which could have been affected in this case had gone the wrong way."