Pile 'em high, sell 'em cheap: weigh up a home loan when you're shopping at Tesco

Melanie Bien asks if the supermarket can succeed where it has failed before, by offering a discounted deal at 4.75 per cent

The next time you pop into your local super- market, you may be surprised to find that you can pick up a mortgage along with your baked beans and cat food. Last week Tesco launched its own branded mortgage, which will be available in more than 700 of its stores.

The next time you pop into your local super- market, you may be surprised to find that you can pick up a mortgage along with your baked beans and cat food. Last week Tesco launched its own branded mortgage, which will be available in more than 700 of its stores.

While supermarket customers have long been able to pick up pet insurance, life cover, car and travel insurance, personal loans, savings accounts and credit cards in store, mortgages have been absent from the range of finance products on offer at the checkout. They have been tried and tested - both Tesco and Sainsbury's have launched home loans in the past - but were withdrawn from sale because take-up was so poor.

Now, as Tesco returns to the fray, it faces an even stiffer challenge. There is so much competition in the mortgage market that the rate has to be attractive to catch the attention of customers who have come into the store to find something for dinner.

So Tesco's strategy is to concentrate its energies on offering one, good, value-for-money product - a three-year variable discount rate.

At 4.75 per cent (guaranteed to be the same as the Bank of England base rate during the offer period), it sits near the top of the "best buy" tables. Only Mercantile Direct's 4.74 per cent has the edge on it.

Once the discount period on the Tesco mortgage comes to an end, the deal reverts to the company's standard variable rate, which is guaranteed to be no more than 0.99 per cent above base - giving a current payable rate of 5.74 per cent. Interest is calculated daily and customers can borrow up to 95 per cent of the value of the property.

There is a £399 arrangement fee for both people remortgaging and first-time buyers, but the former don't have to pay legal or valuation costs. You have the option to overpay by 10 per cent of the borrowed amount during the discounted period (there is no limit after this time).

The Tesco mortgage is provided by First Active, part of the Royal Bank of Scotland group. The supermarket will test customer reaction before deciding whether to add other mortgage deals.

"We want to give our customers a refreshing, simple, straightforward and great-value option," says Alistair Smillie, head of Tesco Mortgages. "By applying Tesco value and pricing, we believe homebuyers will now have a real money-saving alternative to many of the over-complicated products offered elsewhere."

Sainsbury's Bank launched its first mortgage in July 1997 but stopped offering home loans in May this year after rumoured poor sales. However, Stuart McMillan at Sainsbury's Bank says it is reviewing the situation and is aiming to launch another mortgage towards the end of next year.

"We pulled out of mortgages as with most products we try to make a bit of a difference and offer something that puts us near the top of the 'best buy' tables," he says. "But there was nothing to differentiate our mortgage product from what was already on the market.

"It's the nature of a supermarket: we chop and change what is on our shelves according to customer demand."

Other supermarkets have no plans to launch a mortgage at this stage, leaving the field open to Tesco. But while its grocery business is doing well and its financial products - which include insurance, personal loans, credit cards and savings accounts - have been well received, it remains to be seen whether the mortgage will be a success.

James Cotton at broker London & Country likes the product and thinks it will sell well.

"Tesco has done well in other areas of finance," he says. "Maybe customers who have been happy with the other financial products they've bought will consider the mortgage too."

Tesco's mortgage literature will be available in store, so interested customers can take a form away, read the details and contact the company by telephone or online to apply for a home loan. However, Tesco's sales people will not be able to give advice on whether the mortgage is right for the potential applicant.

"We will speak to customers to see what they want from us and if the mortgage meets all their criteria. We won't give advice," says Mr Smillie at Tesco Mortgages.

"A lot of people need advice because there are plenty of complicated products in the mortgage market. But this is as easy and transparent as possible, so if they need a good deal and can understand it, they can come to us."

But Mr Cotton at London & Country reckons there is still a place for independent advice when you take out a home loan - something Tesco can't provide.

"I am sure there are people out there who are more than happy to make their own mind up," he says. "But if you see [the Tesco] rate and think it looks like a good deal, at least have a bit of a shop around. Otherwise, you might miss some of the best deals out there.

"As you can get this rate elsewhere [from First Direct], there is no harm using a broker. You will still get this rate if it's the best one for you, and if it isn't, you'll get a better deal."