Supermarket’s finance arm uses cheap funding-for-lending money to offer 1.99% rate, but only for those with 40% deposit
Tesco’s banking arm is using cheap money from the government’s “funding for lending” scheme to launch a record low fixed-rate mortgage – but it will only be available to customers with big deposits.
The government had hoped the scheme would help first-time buyers who cannot get mortgages.
Tesco Bank is launching the cheapest ever two-year fixed-rate mortgage, priced at 1.99%, to customers borrowing a maximum of 60% of the property’s value. Such a deal, requiring a deposit of 40%-plus of the value of the home, known as loan to value (LTV), excludes the vast majority of first-time buyers who tend to have much smaller deposits.
Tesco also has a mortgage deal with a higher rate for those who can manage a 30% deposit.
The funding for lending scheme went live two months ago and allows lenders to borrow money from the Bank of England at below market rates so they can make cheaper loans to businesses and “families aspiring to own their own home”.
So far it has failed to kickstart the housing market. Figures from the Council of Mortgage Lenders show that mortgage lending fell 10% in September when £11.6bn was lent to homebuyers.
Many commentators say more mortgage deals at 90% and 95% LTVs with better rates are desperately needed to help those struggling to buy.
Richard Sexton, director of e.surv chartered surveyors, said: “The mortgage market is at a low ebb. High loan-to-value lending accounted for less than one in 10 of all house purchase loans in September.
“Funding for lending has yet to jump-start first-time buyer lending – historically the beating heart of the housing market.”
Tesco Bank said it was delighted to pass on the funding benefits to its customers, adding that it was able to offer the new deals “as a result of advanced plans to access the funding for lending scheme”.
The 1.99% rate matches a deal launched by Leeds building society a year ago, though the Tesco loan has a smaller fee, so is arguably the best-value two-year fixed-rate ever offered in the UK.
Jonathan Harris, director of mortgage broker Anderson Harris, said the government scheme was pushing down borrowing costs and resulting in cheaper mortgage rates, “but still it is those with the biggest deposits or similar level of equity in their homes who are benefiting”.
He added: “There is already so much choice at excellent rates for those with big deposits; we need more options at 90% and 95% LTV to help first-time buyers and get the market moving again.”
David Hollingworth, an associate director at London & Country Mortgages, thought it was important that the scheme was not too proscriptive on how it was targeted.
But, he added, “what you are not seeing is a lot of movement around the higher LTV brackets”.
Ray Boulger, senior technical manager at fellow broker John Charcol, said funding for lending “does not specify how the banks should use [the money]” but said he believed that “ultimately, any additional lending this money generates will filter through to the higher LTV end of the market as well.
“It will put pressure on other lenders.”
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