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Government scheme helps Tesco Bank cut two-year fix to 1.99%

Tesco Bank says plans to enter the Government’s Funding for Lending Scheme have allowed it to cut its cheapest two-year fixed rate to just 1.99 per cent.

The direct-only lender has cut its 60 per cent LTV two-year product by a whopping 0.65 per cent from its previous rate of 2.64 per cent.

It has also cut its 2.79 per cent two-year fixed rate, available up to 70 per cent LTV, by 0.4 per cent to 2.39 per cent. Both products have an £800 product fee and a £195 booking fee.

The lender first launched on 6 August this year with a range of two, three and five-year fixed rates, and a range of two-trackers, with a maximum LTV of 80 per cent. It had originally planned to launch into the mortgage market in the summer of 2011 but its entry was delayed by IT problems.

Then in September it slashed its rates by up to 0.5 per cent and then cut them again at the beginning of October by up to 0.4 per cent at the same time as it introduced two 60 per cent LTV products.

Trinity Financial head of communications, marketing and products Aaron Strutt says today’s 1.99 per cent deal from Tesco is similar to the way direct-only lender HSBC in the past launched best-buy products into the market.

He says: “I think we could well see other banks lowering rates on the back of this as they look to close the gap between their two year rates and Tesco’s fix.”

Tesco Bank’s participation in the FLS scheme is subject to completing the application process.

Some 13 lenders have so far signed up to the FLS scheme, and these are: Aldermore, Barclays, Hinckley & Rugby BS, Ipswich BS, Kleinwort Benson, Leeds BS, Lloyds Banking Group, Monmouthshire BS, Nationwide BS, Principality BS, RBS Group, Santander and Virgin Money.

The FLS runs from the end of June 2012 to the end of January 2014 and as part of it the Bank of England will lend UK Treasury Bills to banks and building societies participating in the scheme, who will be able to borrow up to 5 per cent of their stock of existing loans to the UK non-financial sector.

As security against that lending, banks will provide collateral – in the form of loans to businesses and households and other assets – to the Bank of England.

The UK Treasury Bills will be lent to providers for up to four years, for a fee of 0.25 per cent per year if they expand their lending.

But if the banks or buildings societies fail to keep expanding their lending then the fee will be increased by 0.25 per cent for every 1 per cent fall in lending, with a maximum cap of 1.5 per cent.

Tesco Bank chief executive Benny Higgins says: “We welcome the Funding for Lending scheme, and are delighted to be able to pass on the benefit to our customers.

“We are committed to responsible lending and hope to enable our customers to borrow a further £1bn, over the next year, at affordable rates.”

John Charcol’s senior technical manager Ray Boulger says new lenders like Tesco could be in a unique position to benefit from the Funding for Lending scheme.

He says: “Tesco Bank was not authorised by the FSA until after 30 June and its qualifying lending at that date was clearly nil.

“Any new bank, such as Tesco, starting in business after the end of June has a huge advantage over existing banks in terms of accessing the FLS as it will be able to borrow from the FLS close to 100 per cent of its total lending up until the end January 2014.”

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