Tesco is muscling in on the mortgage market with the long-awaited launch next week of a range of deals â€“ just as a home loans price war has broken out on the high street.
From 6 August, the supermarket will be offering a selection of fixed-rate and base-rate tracker mortgages available to homebuyers and those remortgaging. But, as one broker put it, the rates “aren’t bad, but they aren’t market leading either”.
Tesco has arguably made life difficult for itself by unveiling its mortgages just days after some of its rivals launched the lowest fixed-rates ever seen in the UK. Earlier this week NatWest came out with a five-year fixed-rate at 2.95% â€“ putting itself just ahead of HSBC and Santander, which have five-year loans at 2.99%. By contrast, the cheapest Tesco five-year fix is 3.89%. However, to be fair to Tesco, its fees are a lot lower, and those headline-grabbing below-3% deals are only open to people borrowing a maximum of 60% of the property’s value.
Tesco will be hoping its vast customer base and marketing clout, combined with the plunging popularity of the big banks, puts it in a strong position to take a decent share of the market â€“ though some may wonder why it decided to launch its deals when half the country is away on holiday and the other half is glued to the Olympics. Extra competition in the mortgage sector should be good for everyone, but some first-time buyers will feel there is not much here for them, as all the Tesco deals require a deposit of at least 20%.
So what are the rates like? Tesco Bank’s mortgage rates start at 3.19% for a two-year fixed-rate, provided you are borrowing no more than 70% of the property’s value. On that rate, there is an Â£800 product fee and a Â£195 booking fee. For those borrowing 75% or 80%, the rates rise to 3.59% and 3.99% respectively. There are higher rates available if you don’t want to pay a product fee (3.59%, 3.99%, 4.39%).
The three-year fixed-rates start at 3.69%. This deal, and the cheapest five-year fix, the aforementioned 3.89%, are for those borrowing up to 70%. In both cases you also have to pay the two fees.
There are also some two-year base-rate trackers on offer, starting at 3.19% (Bank of England base rate + 2.69%) for those borrowing up to 70%, and rising to 3.99% (base rate + 3.49%) for those wanting 80% of their property’s value.
What about all these other super-low rates? NatWest’s 2.95% deal for those fixing their mortgage has been hailed as the lowest five-year rate ever seen in the UK, but it is only available up to a maximum loan-to-value (LTV) of 60%, and the arrangement fee is well above average at Â£2,495, “obviously to subsidise the rate”, says Ray Boulger at broker John Charcol. But he adds: “This still represents fantastic value for mortgages of at least Â£100,000.”
The HSBC and Santander 2.99% five-year fixes come with fees of Â£1,499 and Â£1,495 respectively, though the latter is only available to existing Santander mortgage customers moving home, or those who have a mortgage and make payments for it from a Santander current account.
Nationwide this week launched a four-year fix at 2.89% for FlexAccount customers borrowing up to 60%, where the fee is Â£900, while for two-year fixes, West Bromwich building society made the best-buy tables with its new deal at 2.95%. This is available up to 75% LTV, and the fee is Â£999.
NatWest also recently announced a market leading five-year fixed-rate at 90% LTV: 4.79%, with no product fee. It’s exclusively for first-time buyers.
Mark Harris at mortgage broker SPF Private Clients says borrowers are starting to opt for fixed rates simply because they are cheaper than base-rate trackers, rather than because they need the certainty of a fixed rate. “Although they may lose some flexibility in opting for a five-year fix, namely that they are tied in for a fairly lengthy period and may only be able to overpay a maximum of 10% a year, as opposed to the unlimited overpayments on some lifetime tracker mortgages, it could be worth it to achieve a rock-bottom rate.”
Going back to Tesco, if I want one of their mortgages, where do I get it? You won’t find them in its stores â€“ the deals will be available online or by phone from its UK based customer service team. Contact details will be available from 6 August at Tescobank.com. They won’t be available from mortgage brokers, at least initially.
Anything else I should know? The Tesco deals offer quite a bit of flexibility â€“ you can make regular or lump sum overpayments of up to 20% of the outstanding balance each year during the initial rate period, without having to pay a penalty. And you can apply for two payment holidays (allowing you to miss a single monthly payment) per year. Those opting for a tracker mortgage can take advantage of a “switch and fix” facility that allows them to hop on to a fixed rate, while those remortgaging will benefit from free standard legal and valuation services.
And, as you might expect, Tesco mortgages provide another way for its customers to collect Clubcard points. Clubcard holders will be rewarded with points as they repay their mortgage, and will collect one point for every Â£4 of monthly mortgage repayment.
What do the experts think about the Tesco deals? Jonathan Harris, director of broker Anderson Harris, wasn’t terribly excited about the rates on offer. He says: “The choice of fees and various loan-to-values is welcome but it would have been good to see some higher LTVs than 80%. The flexibility in terms of being able to overpay is also a good feature. There is no advice available, though, and borrowers can’t speak to someone face to face â€“ it’s all over the phone or online, which will put some people off.”
However, Tesco Bank says it has come out with a “competitive, solid range”, adding: “We are not setting out to be the cheapest in the market. We are looking to offer good all-round value.” Philip Clarke, the chief executive of Tesco, says: “Customers want choice in banking from a brand they know and trust to deal with them fairly. The launch of Tesco Bank mortgages is a major milestone towards offering Tesco customers a full retail banking service.”