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. 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.
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 five 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 one 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.
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, Tesco has a better credit rating than most of our banks and hence will be able to fund itself more cheaply. 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.
