Sub-prime lender City Mortgage Corporation has bowed to pressure from the Office of Fair Trading to scrap high interest rates and massive early redemption penalties on its loans.
The company has been under the spotlight for months for enforcing hefty contract terms on its borrowers.
Interest rates were nearly doubled when customers fell into arrears.
CMC has agreed to abandon "severe" charges imposed on loans taken out since the lender was set up in May 1995.
It had previously agreed to stop writing new loans using the high dual interest rates imposed on business written from August 1, 1997.
CMC has been under pressure to alter its charges after the OFT issued guidelines on non-status lending last year.
The guidelines stated that excessive dual interest rates and the way redemption penalties were calculated were unfair.
CMC borrowers who fall into arrears will now be charged an additional 2.5 per cent instead of 8.1 per cent over its concessionary rate of 9.99 per cent.
Early redemption penalties will be based on a sliding scale from a maximum six months' interest for the first three years of the loan to no charge after eight years.
CMC says it will be writing to all its borrowers affected by the changes. About 11,600 of its 38,000 customers are expected to be covered by the revised terms.
OFT director general John Bridgeman says: "The severity of the double penalties in CMC mortgages was unacceptable and the use of the so-called rule of 78 for early redemption of long-term unregulated loans could not be allowed to continue. Now, all CMC's borrowers will get fairer treatment."