The purchase emerges after a ferocious price war which led Tesco to abandon the mortgage market. Lloyds successfully beat competing bids from rivals Santander and Royal Bank of Scotland. 

The deal comprises of an agreement where Lloyds will pay a 2.5% premium compared to the loan’s outstanding book value. Tesco’s 23,000 customers will accordingly be transferred to Lloyds subsidiary Halifax.

In May, Tesco announced that it would stop new lending and sell its existing mortgage loans in May. They blamed “challenging market conditions” which have decreased profit margins across the whole British banking sector.

Tesco Bank said it would use the money generated from the sale for reinvestment in its remaining businesses and to reduce its funding costs.

Due to legislation introduced last year which forced large banks to separate their domestic businesses from their international and investment banking arms, competition amongst banks has risen.

The so-called ringfencing legislation left lenders such as HSBC and Barclays with a large excess of customer deposits which can only be used in the UK retail market, encouraging them to channel more cash into mortgage lending. 

Despite paying a premium for the loans, Lloyds said the deal would produce better returns than issuing new loans in current market conditions.

Vim Maru, Lloyds director of retail, said: “This is a good deal for the group, our shareholders, and Tesco’s mortgage customers. We believe our Halifax brand will make a good home for these customers and we look forward to welcoming them to the group.” 

Gerry Mallon, Tesco Bank chief executive, said: “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. As a result, we made the decision to move away from our mortgage offering. Our priority throughout has been to complete a commercially acceptable transaction with a purchaser who will continue to serve our customers well.”

Mark Gordon, Director of Mortgages at comparethemarket.com, said: “The news today that Tesco has sold its 23,000-customer mortgage arm to Lloyds Banking Group may spark some concern for the affected customers and what this may mean for their mortgage. Under the terms of the deal, customers will be transferred to Halifax and should see no immediate change to their current rate or mortgage term.

“Even so, it may be worth some of those customers considering refinancing options as the savings could be significant. By shopping around, customers are more likely to find a competitive deal elsewhere – especially as mortgage rates are now very good value. Equally, for those on a standard variable rate, this is an opportunity to switch to a fixed deal which are often far more competitively priced.”