The move will see more than 23,000 residential mortgage customers transfer to Lloyds-owned Halifax.
The sale of the portfolio, for a cash consideration of about £3.8 billion, is expected to be completed by the end of March next year. It comes after Tesco Bank announced in May that it was stopping new mortgage lending and put the business up for sale amid challenging market conditions.
The mortgage portfolio has a lending balance of some £3.7bn and generated a directly attributable pre-tax profit of £9.1 million in the 2018/19 financial year.
Gerry Mallon, Tesco Bank’s chief executive, said: “In May we announced our decision to stop new mortgage lending while we explored our options to sell the mortgage book.
“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.
“After a thorough process, we are pleased to confirm that we have agreed the sale of our mortgage book to Lloyds Banking Group, operating under the Halifax brand. We are confident that they will continue to provide our customers with an excellent customer experience.”
Tesco noted that the customer accounts would shift to Halifax once the necessary transitional arrangements have been delivered, with beneficial ownership set to transfer at the end of this month.
Bank of Scotland-owner Lloyds said the acquired portfolio would generate “good returns” while delivering open mortgage book growth within the group’s “low risk strategy”.
Following the deal, Lloyds expects its open mortgage book assets at the year end to be ahead of the balance at the end of 2018.
Vim Maru, group director of retail at Lloyds Banking Group, 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.”
Tesco Bank said the sale proceeds would be used for re-investment into its customer offer and the “ongoing transformation of the business”.