Tesco, Virgin Move Into U.K. Mortgage Market

Unlikely Lenders See Opportunity as Banks Falter

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LONDON (AdAge.com) -- As storied financial institutions topple and consumers struggle to get loans and keep up with payments, Tesco and Virgin Group are going into the mortgage business.

Although the U.K.'s biggest supermarket chain and Richard Branson's Virgin may seem unlikely financial institutions, both companies say the time is right to offer more choice to consumers who have rapidly narrowing options.

Vanishing institutions
Britain's biggest mortgage lender, Halifax Bank of Scotland, which holds one in five U.K. mortgages, is disappearing as part of a rescue package by rival Lloyds TSB. Bradford & Bingley, another big lender to the average Brit, has collapsed, and Spanish banking group Santander has bought two British banks, Abbey and Alliance & Leicester.

Tesco, on the other hand, this week reported a 10% rise in first-half profits to $2.6 billion. As well as grocery stores, the company already has a financial-services arm offering insurance, credit cards, loans and savings accounts.

Speaking as the company's financial results were announced, Andrew Higginson, Tesco's finance director, said, "This is an opportunity for a challenger brand like Tesco." He added that it is once again possible to make money out of mortgages because "we have seen the return of more rational pricing, and that affords us the opportunity to go in."

Mr. Higginson also said the number of people applying to open savings accounts with Tesco had doubled in the past week as people sought a safe haven for their money.

Marmite and mortgages
Tesco recently bought the half of Tesco Personal Finance that it didn't already own from the Royal Bank of Scotland for $1.77 billion. But Tesco shoppers probably won't be able to fill out their mortgage applications on their next visit to the grocery store. The company said it plans to offer checking accounts within 12 months while mortgages will follow "in due course."

Tesco's financial-services advertising is handled by Red Brick Road, which also works on the main store account. Most of its work to date has been behind insurance products and a financial-services comparison site, "Tesco compare." Tesco uses TV, online, in-store and direct marketing and spends about $15 million annually.

Virgin, meanwhile, is seeking a return to the mortgage market. Founder Mr. Branson announced he is looking to launch a new Virgin mortgage product, because consumers need choice and because mortgages are a more viable business proposition than in recent years.

In 1997, Virgin pioneered offset mortgages in the U.K. with its Virgin One Account, a joint venture between Virgin Direct and the Royal Bank of Scotland. (With offset mortgages, popular in the U.K., interest isn't charged on the full mortgage debt, only on the difference between the mortgage and the amount of money the homeowner has in the financial institution issuing the mortgage.) However, Mr. Branson sold Virgin's share of the company back to Royal Bank of Scotland in January 2003 and exited the mortgage business.

Crisis creates opportunity
Executives at Tesco and Virgin weren't alone in seeing an opening for new competitors amid the current financial crisis.

Ray Boulger, senior technical manager at independent mortgage adviser Charcol, said, "This is a good time for new entrants to the market from a consumer perspective because it will be good for competition. It's also good from the companies' perspective because -- provided they can get a good credit rating for themselves -- they can start a mortgage offering afresh without any of the baggage of bad debt that some other lenders are carrying."

Melanie Bien, director of mortgage broker Savills Private Finance, said, "Margins have improved on mortgage pricing. Lenders are no longer aggressively chasing the market -- they are looking for ways to improve profits and putting a price premium on risk. Tesco has a good track record in retail of competitive pricing and no-nonsense approach. I imagine they will have a straightforward offering for people with decent deposits."
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