when taking mortgage from bank, the usuall contract is presented as a loan with an obligation to pay interest. This is what is signed by the borrower. So how does it help to add the words “this contract works acc. to the Heter Iska”, to change the loan into an Iska. The fact that the bank manager promises to do business acc. to the Torah doesn’t change the fact that they are not ,in practice. Is this called ‘HaRama’ which is not allowed by Torah laws?
You are partially correct.
If the contract states explicitly that it is arranged according to a Hetter Iska, then the Hetter Iska is binding, and the use of terms such as “interest” is irrelevant. Nonetheless, it is preferable not to use such terms in the contract, in order that it should be clear that this is a genuine Iska.
Furthermore, many Poskim rule that the parties to the Iska must understand the nature of the Iska for it to be valid, and thus the use of terms such as “interest” is worse than merely misleading.
Nonetheless, the consensus amongst the Poskim seems to be that as long as legally and Halachically it is in fact an Iska, misleading terms in the contract do not effect its validity.