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8 Oct 2019

Sainsbury's Bank stops offering mortgages: why are smaller lenders struggling to compete?

It joins Tesco and the AA in quitting the mortgage market

Fierce competition in the mortgage market during 2019 has resulted in great rates for customers, but it's been a tumultuous time for smaller providers, with Sainsbury's Bank joining the list of lenders pulling mortgage deals this year.

This move follows AA Mortgages withdrawing in February, Tesco Bank calling it a day for mortgages in May, and Metro Bank selling off more than £500m of loans in July.

Here, we explain why Sainsbury's Bank has dropped out of the market, and offer advice on what to do if your lender decides to sell off your home loan.

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Supermarkets pull out of mortgage lending

Last month, Sainsbury's Bank announced it would no longer offer new mortgages after a review of its financial services arm showed a significant drop in profits.

Since then, there have been rumours that Sainsbury's has been in discussions about selling its mortgage book, worth up to £1.4bn.

This move came just five months after Tesco Bank stopped offering mortgages, before then selling 23,000 home loans to Lloyds Bank last month.

Both Sainsbury's and Tesco launched their personal finance arms in 1997, with Tesco launching mortgages in 2014, and Sainsbury's in 2017.

But while both are powerhouses in the retail world, they've found making a splash in the mortgage market considerably more difficult.

Why are retail giants no longer offering mortgages?

An ongoing period of economic uncertainty has led to profits in the mortgage market becoming increasingly stretched.

Fewer properties are being sold and people are fixing their mortgages for longer, meaning only the biggest banks can afford to compete on rates.

Average rates on two-year and five-year mortgages have only fallen by 0.2% and 0.16% respectively in the last year, but this doesn't tell the whole story.

When we look at the lowest rates on the market, we can see year-on-year falls of as much as 0.5%, as shown in the tables below.

Two-year fixed-rate mortgage

LTVOctober 2018 best rateOctober 2019 best rateYear-on-year change
60%1.38% (Skipton)1.19% (Natwest)-0.19%
75%1.43% (Yorkshire BS)1.25% (Natwest)-0.18%
90%1.79% (Clydesdale)1.77% (Barclays)-0.02%
95%2.79% (Marsden)2.59% (Newcastle)-0.2%

Five-year fixed-rate mortgage

LTVOctober 2018 best rateOctober 2019 best rateYear-on-year change
60%1.83% (Skipton)1.54% (Natwest)-0.29%
75%1.94% (HSBC)1.54% (TSB)-0.4%
90%2.25% (First Direct)2.21% (Nationwide)-0.04%
95%3.45% (Skipton)2.9% (Hanley/Newcastle)-0.55%

How did Sainsbury's mortgage deals rank?

Sainsbury's offered some great deals, but in the end it struggled to keep pace with the biggest banks.

That's because the largest lenders sell loans at a much higher volume, allowing them to keep their funding costs low and reduce their rates, knowing that smaller profits on individual deals will be balanced out by a higher number of sales.

They have also benefited from ringfencing rules introduced at the start of the year, which meant the very largest banks needed to separate their lending arms from their investment operations. This has meant that money that could once be plunged into riskier investments has instead been lent to consumers.

When we look at Sainsbury's best rates from a year ago, we can see that the bank managed to keep pace with its competitors at the popular loan levels of 60%, 75% and 90% loan-to-value (LTV).

Last October, Sainsbury's featured in the top 10 best rates on six of the seven types of mortgage it offered. But were to it to offer these rates now, only two deals would still look competitive.

Most starkly, last year's 1.39% on a two-year fix at 60% LTV would now only be the 18th cheapest deal on the market, down from third place last year.

Two-year fixed-rate mortgage

LTVSainsbury's best rate (October 2018)Rank (October 2018)Hypothetical rank (October 2019)

Five-year fixed-rate mortgage

LTVSainsbury's best rate (October 2018)Rank (October 2018)Hypothetical rank (October 2019)

What happens when your bank stops lending?

As margins continue to get squeezed, we could see more banks cease mortgage lending in the coming months.

Naturally, this can create a climate of uncertainty for customers.

Tesco borrowers were offered respite very quickly, with their loans being transferred to Halifax. It's likely that if and when Sainsbury's sells its loan book, some of the big players will compete to snap it up.

If nothing happens, then all Sainsbury's borrowers will revert to the bank's standard variable rate (SVR) when their fixed period ends.

Sainsbury's says it will keep its SVR (which is currently 4.49%) at a 'competitive rate'. However, if you're paying the SVR and are able to remortgage to a better deal, we'd usually recommend that you do so.

Zombie banks and mortgage prisoners

The main potential danger for customers is their bank ceasing to lend and the loans being sold to a company that isn't an active lender, as happened after the financial crash.

If your loan is moved to a so-called 'zombie bank' and you can't switch to another lender at the end of your fixed term (perhaps due to changes in your circumstances or lending rules), you'll be stuck paying the SVR.

The Financial Conduct Authority is currently investigating ways to help people in this situation, who are commonly referred to as 'mortgage prisoners'.

What should you do if you have a mortgage with Sainsbury's?

The vast majority of Sainsbury's mortgage customers don't need to do anything at the moment, as the terms of their loans will remain the same.

But make sure you keep abreast of whether the bank is selling its loan book, and then reassess what this means for your mortgage if a sale goes through. If a sale doesn't happen, wait until the end of your fixed period and remortgage to another lender.

While it's unlikely that Sainsbury's decision will cause a surge in the number of mortgage prisoners, a small number of customers could face some difficult decisions.

For example, if you're coming to the end of your fixed-rate period but have a short period left on your overall mortgage term, you might have been considering transferring to another deal from Sainsbury's to avoid the fees involved in switching mortgage.

But with the bank ceasing lending, a product transfer won't be possible, meaning you would have a choice between paying the SVR or waiting until the mortgage book has been sold to another lender.

It remains to be seen whether Sainsbury's will introduce a product transfer deal for existing borrowers, but it's worth contacting the bank to discuss your options if you're likely to be affected.

Advice on switching to a cheaper mortgage deal

One bank's loss is another's gain, and a lender leaving the market tends to result in its customers shopping around to move to another provider.

The good news is that now is a great time to get a cheap mortgage deal, especially if you're looking to fix your loan for five years or more.

For advice on ensuring you make the most out of switching, read our guide on remortgaging to save thousands in repayments.