Britain’s biggest supermarket will offer mortgages through a Tesco-branded retail bank, to be launched after buying the other half of its Tesco Personal Finance joint venture from Royal Bank of Scotland.
Finance director Andrew Higginson said the mortgage market had become more attractive because ‘more rational pricing would provide an opportunity to go in’.
The £1bn deal to buy out RBS is expected to complete in November. Higginson will become chief executive of Tesco’s retailing services division, including banking and personal finance, as well as Tesco.com and Tesco Telecoms.
His task is to grow profits from the division to £1bn within the next few years.
Meanwhile, Tesco (up 17.7p at 387.6p) announced an 11.3% rise in half-year profits to £1.4bn, with sales up 14% to £28.1bn.
The supermarket group’s UK like-for-like sales climbed 6.7% in the 26 weeks to August 23, or 3.7% excluding petrol.
Chief executive Terry Leahy was uncharacteristically upbeat about the group’s prospects as it gears up to Christmas. ‘Tesco is at its best in tough markets, responding to the changing needs of customers,’ he said. ‘In general, people tend to spend up for Christmas.’
Leahy admitted Tesco has been losing market share to discounters Aldi and Lidl, but he was convinced shoppers were coming back following the launch of a range of cheaper Market Value-branded products and the introduction of 400 Discount ‘Brands at Tesco’ items.
He admitted, however, that sales of the Tesco Finest premium ranges were not growing and that organic sales were flat.
On a more positive note, Leahy said inflation had peaked. ‘It was higher in the second quarter, but it is coming down and we expect it to reduce over the rest of the year,’ he said.
Leahy believes this will leave room for interest rate cuts before the end of the year. Tesco’s international business also generated strong growth, contributing £346m in trading profit for the first half, compared to £271m for the same period last year.
There’s good news for borrowers as the mortgage market has suddenly become more competitive.
Many smaller banks and building societies had practically pulled out of the home-loan market. As a result, borrowers have had to stick with some of the bigger banks, mainly Lloyds TSB, Barclays and Abbey.
But several smaller lenders and building societies have returned with some good deals.
Anyone remortgaging today has a big decision: to fix or to track the Bank of England base rate.
Some economists believe interest rates may fall to 3.5% in the next year, with at least one cut of 0.25 percentage points to be made this year. Partly because of this, rates on the money markets, where banks go to borrow cash to fund fixed-rate mortgage deals, have been falling.
The best two-year fixed rate is cheaper than the best two-year tracker rate at the moment, says fee-free broker London & Country.
Britannia BS, one of those lenders to reappear in our Best Buys table, has a rate of 5.44% with a £999 fee. You need to have at least a 25% deposit.
Repayments on a typical £150,000, 25-year mortgage would be £916 a month. The total cost over two years would be £22,983.
Cheltenham & Gloucester, part of Lloyds TSB, has a rate of 5.49%, but because of its large fee of £2,094 it is suitable only for those with a big mortgage. (Repayments of £920 over two years would come to £24,274.)
If you have a smaller loan, Yorkshire BS has a rate of 5.54%, with an £895 fee. (Repayments £925, total cost £23,095.)
You should take a tracker only if you can afford to risk that the Bank of England base rate, and therefore your repayments, may increase
The best two-year tracker is from Principality BS at 0.49 percentage points above base rate. There is a £999 fee and you must have a 40% deposit. Initial repayments would be £920, but should rates rise once by 0.25 points, you would be paying £943.
For those with a smaller deposit of at least 25%, Cheltenham & Gloucester is good at 0.59 points above base. Again its fee of £2,094 makes it worthwhile only if you have a bigger mortgage sum (initial repayments £929).
First Active, part of NatWest and available only through mortgage brokers, offers 0.74 points above base with a fee of £999 (initial repayments £943).
If you want to hedge your bets, Barclays lifetime tracker, at 0.69 points above base for a £995 fee (initial repayments £938) or 0.89 points above and fee-free (initial repayments £956), is still the best around. You need a 40% deposit. You can overpay as much as you like, and if rates do suddenly rise you can take out a fixed-rate mortgage without penalty.
Monthly interest payments on a £150,000 mortgage would be £956 on the fee-free deal, but if base rate falls by 0.5 percentage points to 4.5%, repayments would be £911.
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