The news that Tesco Bank is pulling out of the mortgage market is significant for several reasons.
It is bad news for borrowers, of course, but the move should also cause financial advisers to stop and suck a thoughtful tooth.And it is a blow to all consumers for the simple reason that it will mean less competition.
But it could prove a serious blow to the 23,000 people who have a mortgage with the supermarket.
The supermarket giant – which entered the mortgage market in 2012 – will flog its £3.7bn home loans portfolio to anyone it can.
It says its customers do not need to take any action and that people’s mortgage rates and repayments will not be affected by any sale.
That is hooey, as was shown by Tesco’s response to a letter from 27 MPs urging the supermarket to sell its mortgage book to an active lender.
The politicians were rightly concerned that the 23,000 borrowers could end up as mortgage prisoners.
The letter stated: “We have seen the damaging impact when mortgages are sold to vulture funds or inactive lenders which hold trapped customers on high standard variable rates.”
But Tesco’s less than convincing response stated: “Our priority in any sale is to complete a commercially acceptable transaction with a purchaser who will continue to serve our customers well.”
There are around 20,000 homeowners stuck with lenders that are no longer active and so are prey to rip-off high standard variable rates.
That is not a problem for those people who are able to switch to a better deal, but it is a problem for those whose circumstances have changed and so cannot get a new mortgage elsewhere.
I believe lenders should be forced to ensure that borrowers do not end up mortgage prisoners, but there are currently no rules to stop them.
In March, Christopher Woolard, executive director of strategy and competition at the Financial Conduct Authority, said: “We are particularly concerned about consumers, who are commonly referred to as mortgage prisoners, who are currently unable to switch.”
The regulator has proposed changes to how lenders assess whether or not a customer can afford the loan.
That should be good news for borrowers who are up-to-date with their mortgage payments and seeking to move to a more affordable deal without borrowing more.
Under the proposed changes, active lenders will be able to undertake “a more proportionate assessment” of whether they can afford the new loan.
The consultation period on the proposals ends on June 26 and it is clearly worth advisers keeping an eye on the issue so that you can inform clients of the potentially positive rule change.
But the bigger issue around Tesco fleeing the mortgage market is what the move means for the financial services industry.
