Tesco Bank pulls out of mortgage market

The supermarket group's bank said it had stopped new mortgage lending immediately and would try to serve a broader range of customers in more areas.

Banks and building societies are competing fiercely for mortgage customers by offering historically low rates. A stagnant housing market has added to more than a decade of ultra-low interest rates to squeeze the profitability of new loans, favouring big lenders with the scale to make money on tight margins.

Gerry Mallon, the bank's chief executive, said: "In recent years, challenging market conditions have limited profitable growth opportunities. Our focus is on how we best serve Tesco customers and align our resources effectively to their needs while ensuring that our offer remains sustainable in the long term … We have therefore chosen to cease lending to new customers and announce our intention to explore a sale of our portfolio."

Tesco Bank has sold mortgages since 2012 and has more than 23,000 mortgage customers. Mortgages were the bank's fastest growing business in the year to the end of February as balances rose by 25% to £3.75bn. But growth in the low-margin mortgage business caused the bank's net interest margin to shrink.

Russ Mould, investment director at AJ Bell, said: “Cheaper mortgages are obviously good news for prospective homeowners and in that sense the market is working but the banks’ desperation for new mortgage business needs to be closely monitored. Tesco's decision to find an exit shows admirable discipline and demonstrates a drive to focus on more sustainably profitable activities."

Tesco Bank has 5.6m customers and £12.4bn of loans in total. As well as mortgages it sells credit cards, personal loans and insurance. The retailer bought Royal Bank of Scotland's stake to become full owner of the business in 2008.