Tesco Moves into Mortgages

From this week, you can pick up something unusual from the tills at Tesco: a home loan. That’s because the UK’s largest supermarket chain has just launched a range of mortgages.

Try a Tesco mortgage

Through its Tesco Bank arm, Britain’s biggest grocer now offers home loans to borrowers with at least a 20% deposit. This suggests that Tesco doesn’t want to get into the riskier end of the market, such as first-time buyers and anyone else borrowing more than 80% of a property’s value.

Tesco Bank now offers a range of two-, three- and five-year fixed-rate and two-year tracker mortgages, all of which earn Clubcard points.

These home loans are open to homebuyers and existing borrowers looking to remortgage from other lenders. However, Tesco mortgages cannot actually be bought at the till or in-store, nor will they be available from mortgage brokers. Instead, applicants must apply online or by telephone.

Tesco Bank’s lowest mortgage rate is 3.19% for a two-year fixed or tracker loan. This comes with a £995 fee and requires a 30% deposit, giving a maximum LTV (loan-to-value ratio) of 70%. For a five-year fix on similar terms, Tesco charges 3.89% a year.

25 years of Clubcard points

Tesco Bank — originally created in 1997 as a joint venture with Royal Bank of Scotland, but wholly owned by Tesco since 2008 — already has 6.5 million customers. These customers have savings accounts, credit cards and/or loans with Tesco, the leading rival to the high-street’s ‘Big Four’ of Barclays, HSBC, Lloyds and RBS.

One bonus for Tesco Bank mortgage borrowers is that their monthly repayments will earn Clubcard points. Borrowers will receive one point for each £4 paid each month. Therefore, monthly repayments of £800 will earn 200 Clubcard points per month. Then again, as these add up to just £24 a year in this example, reward points aren’t a big factor when comparing Tesco’s home loans with others.

Entering the mortgage war

Tesco first announced its plans to move into full-service banking three years ago, so this latest step has been a long time coming. What’s more, the supermarket may have picked a bad time to take on the banks, as the UK’s leading lenders are waging war by driving down mortgage rates.

To be honest, Tesco Bank’s new mortgages are nothing to get excited about, as they are not exactly market-beating home loans. Indeed, its range of fixed and tracker mortgages can easily be beaten by what’s already out there on the high street.

However, while Tesco’s headline rates are not particularly eye-catching, its arrangement fees can be lower than those charged by the market leaders. Therefore, in some cases, its loans do have an edge over the opposition.

Tesco’s rates

Tesco Bank’s range has 24 different mortgage rates on offer, based on four different rate periods, three deposit levels and two fee levels. Here they are:

12 loans with a £995 fee

Loan/Deposit 30% deposit 25% deposit 20% deposit
Two-year tracker 3.19% 3.39% 3.99%
Two-year fix 3.19% 3.59% 3.99%
Three-year fix 3.69% 3.99% 4.39%
Five-year fix 3.89% 4.19% 4.69%

12 loans with a £195 fee

These dozen loans come with a fee £800 lower than Tesco’s standard fee, but with higher interest rates:

Loan/Deposit 30% deposit 25% deposit 20% deposit
Two-year tracker 3.69% 3.89% 4.49%
Two-year fix 3.59% 3.99% 4.39%
Three-year fix 3.99% 4.29% 4.69%
Five-year fix 4.29% 4.59% 5.09%

As you can see, these rates are between 0.3% and 0.5% higher than those shown in the first table, which helps to offset the £800 fee cut. Obviously, borrowers with larger loans will be better off paying the higher fee in return for lower rates.

All 24 deals revert to Tesco’s standard variable rate of 4.24% a year when they end, which is not a particularly competitive rate. Also, they all allow borrowers to overpay up to a fifth (20%) of their loans each year without penalty, which is better than the usual 10% cap on overpayments.

Every little helps

As I said, these deals don’t stack up against the Best Buy mortgages currently out there. Broadly speaking, Tesco’s rates are up to 0.5% higher than table-topping loans on offer to similar borrowers. What’s more, borrowers with really big deposits (say, 40% or more) can access ultra-low five-year fixed rates below 3% a year.

One Tesco mortgage that does stand up well against the competition is its two-year fix at 3.59% with a fee of £195 (minimum 30% deposit). Northern Rock’s rate for the same 70% LTV loan would be 3.19% with a £1,094 fee. The £899 saving from Tesco’s lower fee means that, over two years, its loan would be £259 cheaper for a borrower with a £160,000 interest-only mortgage.

Coming next year: Tesco current accounts

Finally, Benny Higgins, Tesco Bank’s chief executive, claims that Tesco will launch current accounts in late 2013, after new rules are introduced to make switching accounts easier. In June, Marks & Spencer entered the current-account market and will eventually follow Tesco by adding mortgages to its range of financial products. Let’s hope this leads to more competition for our hard-earned money!