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20 Thursday Dec 2012

Every little helps? Posted by:

Tesco is in the news for launching a market-leading two-year fixed-rate mortgage at less than 2 per cent. Pegged at 1.99 per cent with reasonable £995 fee, the fly in the ointment is the 40 per cent deposit requirement, which will price out many, particularly first-time buyers.

It’s a cracking deal for those who qualify. Tesco is able to offer the rate that leaves its competitors in the shade because it accessed cheap money via the government’s Funding for Lending (FLS) scheme, designed to boost the availability of funding for individuals and businesses.

However, there are already plenty of rock-bottom deals available to those borrowers with 40 per cent deposits or similar levels of equity in their homes. What isn’t so easy to come by is cheap deals for those with much more modest deposits. This is where the FLS needs to reach, targeting those who only have 10 or even 5 per cent to put down.

Currently, these borrowers are paying a significant premium on the mortgage rate compared to those with much bigger deposits. For example, someone with a 5 per cent deposit can access a two-year fix at 5.99 per cent from Newcastle building society. There is no fee but you are paying a whopping 4 percentage points more than the Tesco borrower. That works out at an extra £500 or so a month.

It makes little sense that those who can least afford it have to pay such a premium for a mortgage. Tesco famously claims that ‘every little helps’ but if they only offer value to those with hefty deposits, then I beg to differ.