Every mortgage helps...
Posted on 6 August 2012 by
Any new mortgage lender, especially one with the potential firepower of Tesco, is a very welcome addition to the mortgage scene. However, any hopes that the entry of Tesco would produce a significant increase in competition have been dashed, at least initially, by its opening rates, which seem to be designed more to avoid getting too much business than to ruffle the feathers of existing lenders.
Having said that the concept of launching with an uncompetitive range is sensible as any new lender needs to test their systems and it is obviously best to do this with low volumes. However, these initial rates look sufficiently uncompetitive to question whether they will generate enough volume to even do that.
Tesco claims its mortgages offer competitive rates. Its opening rates would have been competitive a month ago but not now, unless Tesco has re-defined the word competitive.
Taking the 5 year fixed rates as an example, its rates are at least 0.5% higher than the most competitive lender at each of its three LTV bands (70%, 75% and 80%), with many of the cheaper competitors also offering lower fees on purchases. For borrowers who only need an LTV of 60% or less Tesco is even more uncompetitive.
But mortgages are not only about the rates. How does Tesco fare in other important areas? Tesco’s proposition is to provide information only. Most people want advice when choosing a mortgage, recognising the many pitfalls in today’s market, and the FSA’s draft Mortgage Market Review significantly extends the circumstances in which advice will have to be offered in the future.
Tesco’s SVR is the same as Santander’s but higher than the SVR (or in Woolwich’s case it’s revert to tracker rate) of all the other 5 largest lenders, who between them account for over 80% of gross lending. This doesn’t sit well with Tesco’s well publicised stance on price competitiveness, even though if one just takes a simple, rather than weighted, average of SVRs Tesco could claim the SVR is competitive.
Tesco is offering 1 Clubcard for every £4 of mortgage repayments. This is an obvious gimmick for Tesco, and fits in with its strategy on some other Tesco Bank products. However, although every little may help, the value this adds to its mortgages is tiny and certainly should only be seen as a modest bonus rather a reason to choose a Tesco mortgage. For example on a typical £750 per month mortgage payment the basic value of the Clubcard points is only £1.88 per month, although as Clubcard holders will know it is fairly easy to boost this to double value by spending them in the right way.
One good feature Tesco has copied from another new entrant to the mortgage market, Metro Bank, but which few other lenders offer, is that overpayments of up to 20% p.a. are allowed without an early repayment charge (ERC) being incurred. Few borrowers will be able to take advantage of this in full but it is nevertheless a feature consumers like as there is always the hope of a windfall allowing the mortgage to be paid back quicker. Other lenders should consider upgrading their normal 10% p.a. maximum ERC free overpayments to 20%.
It only offers tracker mortgages for a 2 year term, but they do include a useful droplock facility, which allows a switch to a fixed rate without incurring an early repayment charge, although there will be another arrangement fee to pay.
Even if Tesco subsequently beefs up its rates, which it will have to do if it wants serious volumes, limiting availability to online and phone applications will severely limit its potential market. For something as complicated as choosing the right mortgage most borrowers prefer face to face contact, as well as wanting advice.
The alternative to offering competitive rates it to offer something else valuable, such as flexible underwriting and/or great service, combined with reasonable rates. It will be interesting to see what Tesco can deliver in both these areas. Will it be another “computer says no” lender?
Tesco’s last excursion into the mortgage market, when it white labelled First Active’s products, proved that even a powerful brand is not enough for success if the underlying product does not offer good value. First Active’s mortgage range was initially very competitive (it was then a new brand for RBS) but after a while it became less so and as a result Tesco Mortgages suffered.
If Tesco expects to rely on its brand to generate mortgage sales it is likely to be underestimating its customers. Bearing in mind that one of the only two ways to apply for a Tesco mortgage is over the internet (the other is by phone) it seems unlikely that most of its customers who apply over the internet won’t be savvy enough to do a simple internet search to find cheaper offers elsewhere.
However, the answer is simple. Tesco has a better credit rating than most of our banks and hence will be able to fund itself more cheaply. There seems little point in a company of Tesco’s size entering the mortgage market unless it has ambitions to do be a serious player. If it has such an appetite it clearly has the potential to acquire the firepower, i.e. funding, to be just that.
Once it is satisfied its systems are working well, and it has ironed out any teething problems, beefing up its rates to make them competitive should still allow a good level of profitability. Unlike many existing banks and building societies Tesco has no baggage from a back book of mortgages at rates which are under water or where there is little or no equity, which is very expensive in terms of regulatory capital requirements. Will Tesco adopt the old “pile it high and sell it cheap” policy of the early supermarket days. Time will tell.
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