WITH its competitive interest rates and eye-catching cashback incentives, high-profile challenger Tesco Bank had become a mainstay of the mortgage best-buy tables since first breaking into the lending market nine years ago.
Indeed, just this month financial information business Defacto listed its two-year fix as being among the 10 most attractive on the market while Tesco Bank’s £1,000 cashback deal was name-checked by Moneyfacts as being one of the most lucrative perks on offer.
Yet while such deals will have been partially responsible for reeling in the 23,000 mortgage customers currently on Tesco Bank’s books, the bank itself has suffered from trying to keep pace with the competition.
It has suffered so much, in fact, that it announced during the week that it will not only stop making any new loans with immediate effect but that it is looking into offloading its existing mortgage book too.
The reason, according to Tesco Bank chief executive Gerry Mallon, is that the hyper-competitive nature of the market has resulted in “limited profitable growth opportunities” for organisations which, like Tesco, have managed to capture only a small share of that market.
Tellingly, Mr Mallon added that the bank’s focus now will be on how it can “best serve Tesco customers and align our resources effectively to their needs while ensuring that our offer remains sustainable in the long term”.
Quite what the decision will mean for existing mortgage customers is not yet clear, with Mr Mallon saying only that Tesco Bank’s intention “is to complete a commercially acceptable transaction with a purchaser who will continue to serve our customers well”.
Although he said that the organisation was exploring its options as regards a sale, he gave no indication of what those options might be, leading to fears that the Tesco mortgage book could be offloaded to an unscrupulous buyer such as a vulture fund or inactive lender.
Having this month co-founded an All-Party Parliamentary Group to support the so-called mortgage prisoners who have become trapped by higher rates after their loan has been sold on, Feltham and Heston MP Seema Malhotra urged Tesco Bank to “commit to only selling its mortgage customers to a fully regulated, active lender which will offer its customers fixed rates and new deals”.
Despite that, for now the impact of any sale remains moot, with Tesco Bank simply promising to write to its customers “to explain what the sale means for their account” as and when a deal has been confirmed.
What is clear is that Tesco Bank has fallen prey to the same kind of competitive pressures that have already seen Secure Trust Bank pull out of the mortgage-lending market and the likes of Clydesdale Bank owner CYBG and Nationwide highlight the risk to their margins.
“Rates in the fixed-rate mortgage market have reduced significantly over time and it is clear that margins – especially at the lower loan-to-value tiers – are narrow, with little margin to cut them much further,” Darren Cook at Moneyfacts said.
For Andrew Montlake, director of the broker Coreco, it was trying to stay at the forefront of those cuts that ultimately proved unmanageable for Tesco Bank.
“With transaction levels painfully low, the mortgage market has never been as competitive as it is right now,” he said. “Margins are being squeezed as rates race to the bottom in a bid for market share and Tesco appear to be saying that the numbers no longer stack up for them.”
Despite this, Mr Montlake said that on its own the loss of Tesco would be nothing more than “a small blow to consumer choice”, with there still being “lenders aplenty that are financially strong and keen to get money into the market”.
Indeed, according to the Moneyfacts website there are currently 844 two-year fixes on offer for customers looking to remortgage on a loan to value of 60%, with rates ranging from 1.39% on a product from Barrow-in-Furness-based Furness Building Society to 6.34% from Vida Homeloans, a provider that lends to customers who do not meet high street lenders’ criteria.
Similarly, first-time buyers with a 5% deposit can pick from 102 different two-year fixes, with rates ranging from 2.59% at Newcastle Building Society to 4.88% at Aldermore.
The problem is that where one provider dares to tread others generally follow, meaning Tesco’s decision could have a knock-on impact on the choices on offer to mortgage customers in general.
Indeed, with Tesco Bank putting its head above the parapet to admit how hard it is to operate in such a competitive environment, is it simply a matter of time before other lenders follow its lead?
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