Asic has accused banks of “not getting the basics right”, after the regulator found faulty mortgage offset accounts meant borrowers were being overcharged tens of millions of dollars in extra interest payments.

In a new report, the Australian Securities and Investment Commission showed lenders repaid $55m to hundreds of thousands of customers over two years for offset failures, and warned this figure would climb higher as remediation continued.

The amount of savings Australians hold in these popular accounts has ballooned to nearly $350bn in recent years. The money is supposed to be offset against the outstanding loan value, reducing the interest payable.

A borrower with an outstanding loan of $100,000 and $20,000 in a properly linked mortgage offset account, for example, should only be paying interest on $80,000.

Asic’s review of more than 200,000 home loans from eight banks unearthed poor practices by lenders.

In one case, a bank accidentally unlinked a customer’s offset account when processing a change to their mortgage. That went undetected until the customer noticed their higher repayments and complained.

In just one month, the customer had paid more than $3,500 in additional interest “as a direct result of the offset account not being linked”, the report found.

Some banks couldn’t readily identify whether the customer had even requested an offset account – a finding which suggested the problem could be even more widespread than initially thought.

Sarah Court, the Asic chair, said “some banks are not getting the basics right”.

“When offset accounts don’t operate correctly, the harm can be hidden. Loan repayments stay the same, while customers unknowingly pay more interest and take longer to repay their loan.”

That represented a double blow to customers who lose the promised interest savings, but also the opportunity to have used that money elsewhere, Court said.

Of the 204,000 home loans, Asic found issues with hundreds of mortgage offset accounts. Simon Birmingham, the CEO of the Australian Banking Association, said this meant that “in more than 99% of cases banks were found to manage them correctly”.

“As the report states, banks have already taken action to compensate the small number of customers where those banks identified errors, often manual errors,” Birmingham said.

Among Asic’s key concerns were that banks had failed to compensate customers and were slow to fix issues, and that it was hard for customers to identify when their offset was not operating as intended.

“In some cases, offset failures went undetected until Asic started asking questions. That should concern every bank offering offset accounts,” Court said.

Meg Dalling, an assistant director at the Consumer Action Law Centre, said “people sign up for mortgage offset accounts with the promise of substantial interest savings – banks must deliver on these promises”.

The multiple failures identified by Asic in its review meant it took longer to pay off a loan, Dalling said.

“This is unacceptable in a cost-of-living crisis – the community expects better from their bank.”

Sally Tindall, the director of data insights at Canstar, said she was “alarmed” by Asic’s findings.

“It is disappointing. People with a mortgage are focused on making their monthly repayment and keeping their heads above water. They don’t have time to be double-checking their bank, and nor should they.”