Tesco Bank slashes mortgage rates
Tesco Bank has slashed the rates on its mortgage range, but only borrowers with at least a 40% deposit will benefit from the cuts.
Its two-year fixed rate mortgage now has a rate of 1.74%, rising to 2.29% for the three-year fix, and 2.49% for its five-year product.
However, despite the low rates, all the fixed-rate mortgages come with a high arrangement fee of £1,300 plus a £195 booking fee.
Tesco has also cut the rates on its two-year tracker mortgage, as well as introducing a new ‘thank you' scheme, which gives mortgage customers one Tesco Clubcard point per £4 repaid.
David McCreadie, managing director of banking, said the new rates "provide outstanding value to customers" and argued that the fees are "competitive".
Since the government introduced the Funding for Lending scheme last year, giving lenders access to cheap cash, banks have been offering record low rates for borrowers, as long as you have a bigger deposit.
Andrew Hagger of Moneycomms.co.uk says that if you took out the best five-year fixed rate in December, with a mortgage of £250,000, you could be paying £75 a month more than you would under Tesco's new deal.
He said: "The rate cuts from lenders seem to be getting smaller and you wonder if we're almost at the stage where rates are bottoming out – for those customers sitting on an SVR of 4% or more, now's the time for a long hard look at some of the longer term fixed rates on offer."
How does Tesco Bank compare?
Norwich & Peterborough Building Society's (N&P) five-year fix offers a higher rate of 2.74% compared to Tesco Bank's, but has a much lower fee of £295.
Hagger says that if you were to take out a mortgage of £150,000 over a 25 year term N&P would work out cheaper, but if you were borrowing over £150,000 Tesco would offer better value.
The two-year fixed rate mortgage from Tesco Bank is better value – it equals the lowest rates on the market, but also has the lowest fee.
The three-year fix equals the rate of First Direct's current best buy, with the First Direct deal having a much higher fee of £1,999, but you only need a deposit of 35% for the mortgage.
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.