Q&A: Tesco checks out of mortgage market


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Borrowers with Tesco Bank this week learnt it would be pulling out of the UK mortgage market, blaming “challenging market conditions”. The retailer’s banking arm is exploring a sale of its £3.7bn mortgage loan book, with about 23,000 borrowers, against a background of intense competition on mortgage rates and tightening margins across the industry. The pressures on Tesco Bank were underlined this week by results from a major high street lender, Nationwide, which revealed a 15 per cent fall in profits and a shrinking net interest margin — the difference between what the building society pays for deposits and what it earns from lending. I have a mortgage with Tesco. What will happen now? For now, nothing. The terms and conditions which underpin your mortgage agreement will remain in place, and that includes the rate of interest you pay if you have a fixed-rate mortgage. If Tesco finds a buyer for its loan book, the acquiring company will also be obliged to stand by the terms and conditions originally agreed in the loans, though there are no guarantees that levels of service will remain the same under a new owner. Tesco has nonetheless said it is seeking “a purchaser who will continue to serve our customers well”. David Hollingworth, associate director at broker L&C Mortgages, says Tesco’s existing fixed-rate borrowers should review the options offered by the bank and compare them with those available elsewhere, “and they should do that well before their fixed-rate deal comes to an end”. What about the Clubcard points? Tesco currently offers customers with its supermarket loyalty card one Clubcard point for every £4 they repay — a perk that will end when the mortgage book is sold. You could attempt to clock up more points by paying off a lump sum — but as one point is only worth one penny, it’s hardly the deal of the decade. If I’m on a variable rate, what’s to stop a new lender putting the rate up? A lender’s standard variable rate (SVR) is by definition a managed rate and therefore in theory, they can move them where they want. The SVR is usually a lender’s most expensive rate. But price gouging is unlikely — regulated lenders are typically sensitive to the Financial Conduct Authority requirement that they treat customers fairly. Will Tesco’s decision have a wider impact on the mortgage market? Tesco is a relatively small player in the UK mortgage market, with 0.2 per cent of total mortgages outstanding, according to 2017 figures published by industry body UK Finance. The top six lenders account for more than 70 per cent of the market. If a bigger lender were to exit, this could theoretically lead to less jostling on rates and poorer deals for consumers. But Tesco’s withdrawal from the market is unlikely to cause such ripples. Ray Boulger, senior technical manager at broker John Charcol, said that he thought Tesco’s move would not be an isolated case, but would be followed by smaller, non-building society lenders rather than established volume lenders. “I don’t see any of the top 10 lenders — or even the top 20 — pulling out . . . In terms of the capacity of the market it won’t make an awful lot of difference.” I’ve fallen behind on my mortgage payments. Is this going to make things harder for me? If you decided you would benefit from switching to another mortgage provider you’d need to find out first whether you meet their affordability criteria. If you’re in arrears, that could be more difficult. Some lenders are better at helping with “impairment” than others, says Mr Hollingworth. You could ultimately find your switching options limited, whether Tesco sells its mortgage book to a high street lender or a group that is unable to write new mortgages. If you are on a fixed-rate deal and cannot move, you could end up stuck on an SVR when the deal comes to an end. The Financial Conduct Authority is currently looking at changing the rules for so-called “mortgage prisoners” who are trapped on more expensive interest rates and unable to switch — but the measures it is considering are aimed at helping those who borrowed before the financial crisis. Tesco Bank began mortgage lending in 2012. However, borrowers can take some comfort from the fact that Tesco’s pledge to seek a buyer that treats customers well has been seen as a sign it would be likely to want to sell to an active lender, rather than a closed-book investment group. Mr Boulger said: “I can’t believe that having taken the opportunity of trying to avoid any criticism by putting that in writing, they would do something that would contradict that.”


Written by Loknath Das