Tesco Bank announced that it is stopping new mortgage lending and that its mortgage portfolio is now for sale. Tesco Bank blamed "challenging market conditions" and "limited profitable growth opportunities" for its decision to withdraw from the sector.
Tesco Bank has lent around £3.7 billion to more than 23,000 homeowners. Some of these homeowners are based in Northern Ireland, where loan sales of this nature were a common occurrence, particularly after the financial crash. Large portfolios of Northern Irish residential mortgages have been sold to a whole range of purchasers. It remains to be seen who will bid for Tesco Bank’s mortgage book.
The impact of a mortgage portfolio sale is likely to be mainly felt by mortgage holders as they come to re-mortgage, particularly if reduced rates or attractive mortgage deals are no longer available at the end of a fixed term mortgage product. The all party parliamentary group on mortgage prisoners has written to Tesco Bank urging the bank to sell its mortgages to a "fully regulated, active lender". This request has been made to help prevent homeowners being tied into existing mortgages when they could get a cheaper deal elsewhere, so called 'mortgage prisoners'. A sale to a "fully regulated, active lender" reduces the likelihood of mortgage prisoners as borrowers are more likely to be offered competitive mortgage deals if they need to borrow more or change their mortgage product.
Tesco Bank's current general mortgage conditions in Northern Ireland (the Terms) explicitly permit Tesco Bank to transfer a mortgage loan and the associated security created by a mortgage deed to "any other person at any time". Such wide transfer rights in favour of a lender are common. If a sale occurs, homeowners will still be subject to the same responsibilities and liabilities, including the liability to repay a mortgage loan, but those responsibilities and liabilities will be owed to the purchaser of Tesco Bank's mortgage book rather than Tesco Bank.
The Terms state that Tesco Bank will ensure that the purchaser of a mortgage loan will take on responsibilities at least the same as those currently owed by Tesco Bank. In addition, the Terms state that Tesco Bank will "only transfer our responsibilities if we believe that your [the homeowner's] rights under the agreement won't be affected negatively by that". Perhaps homeowners will take comfort on this point.
The fact that Tesco Bank is the sixth lender in the last six months to announce that it won't continue to offer new mortgage loans is of wider concern. These withdrawals from the mortgage lending is evidence of competitive pricing and tough market conditions. Smaller lenders are struggling to gain a foothold and then retreat from mortgage lending, allowing the main mortgage lenders to continue to dominate.
Several prominent local lenders have shown clear commitment to mortgage lending in Northern Ireland with some currently running prominent campaigns offering attractive mortgage rates and deals. Local lenders tend to be best placed to generate enough business to make a mortgage offering viable and profitable. These successful mortgage lenders have been able to leverage off their funding base, established procedures and high street presence to offer mortgages that customers respond well to. Added incentives include low fees, cashback arrangements and long-term fixed rates at attractive margins.
It may be premature to read too much into Tesco Bank's decision to withdraw from mortgage lending. It shows a willingness to shift tack and offload divisions that are not as profitable as expected. Tesco Bank seems to be responding to a cooling off of the mortgage market and historically low interest rates hindering expansion plans. If Tesco Bank can’t see enough profit and growth in this sector we may find that other mortgage providers also withdraw from this type of lending.