Money Insider: Tesco's modest mortgage debut shows promise
Saturday 11 August 2012
On Monday, Tesco Bank extended its suite of financial services products as it launched its first range of residential mortgages.
The foray into mortgages has been delayed on a number of occasions, but with technical glitches causing some of its high street banking rivals huge issues in terms of reputational damage and financial cost, it's understandable that Tesco wanted to be sure it was absolutely ready and had a solid infrastructure in place.
The products, available online or by telephone but not through brokers, comprise fixed-rate deals for two, three and five years plus a two-year tracker. Flexible features include the ability to make overpayments of up to 20 per cent of the outstanding balance each year, double that allowed by many lenders.
Some commentators were quick to stick the knife in, claiming Tesco's rates were uncompetitive and the range too limited.
I'll be the first to agree that the rates aren't chart toppers and you can find better deals out there. For example Tesco's two-year fixed rate with no fee is priced at 3.59 per cent whereas the best buy from Barclays is 3.29 per cent.
However if you're launching into the UK mortgage market from scratch, and not buying up a back book from another lender, as some rivals have done, you need to take a sensible approach to pricing to ensure you're not inundated with applications for best buy deals from day one which leads to you struggling to provide a satisfactory level of service.
Over the past few years Tesco Bank has become a formidable player in the credit card and personal loans space, where it is frequently among the top three in terms of competitiveness.
So even though the initial mortgage rates may be a little off the pace, as the business develops I expect to see lower-priced deals start to emerge if Tesco wants to seriously challenge some of the more established mortgage lenders.
The fixed-rate fix
In this environment of low interest rates, many savers are still looking to earn the highest possible return on their savings.
One sure-fire way to bag a better rate is to lock your money away in a fixed-rate bond rather than an everyday easy access account.
The trade-off is that for a better return you lose access to your cash – or at least that's the theory.
The latest research from Moneynet shows a different picture and highlights that many of the biggest financial providers on our high streets offer a poor deal to savers, particularly those looking for a one-year fixed-rate account.
The newer and less-established financial providers tend to offer the same interest rate regardless of the amount involved, so whether you're saving £500 or £50,000 you get the same rate.
But sadly that is rarely the case with the main financial institutions. Rates for amounts below £5,000 are particularly poor and in some instances – with the accounts from Lloyds TSB, HSBC and NatWest you can't open a one-year bond unless you've got at least £2000 to deposit.
While £500 or £1,000 may seem insignificant in the eyes of these banks, surely their customers deserve to have a fixed-rate option even at this level rather than being forced to take their custom elsewhere.
A further issue is that because the main banks still operate a system of tiered interest rates, it's often only those with £25,000 or more to tuck away that receive a better return – yet even at this level some still fall well short of the best buy rates. The returns on these very straightforward accounts can vary quite markedly.
On a balance of £5,000, Barclays, Lloyds TSB and HSBC will pay you 2 per cent AER for a one-year term, compared with 3.45 per cent from Aldermore, 3.4 per cent from Kent Reliance and 3.25 per cent AER from the Post Office and Coventry Building Society.
If banks are serious about encouraging the savings habit and retaining their less-affluent customers, competitive rates should be made available to all, not just those with a five-figure lump sum at their disposal.
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