Santander is slashing interest and cashback it pays to holders of its 123 current accounts in May and bringing in an overdraft rate of 39.9 per cent in a major shake up of its bank accounts.
The 123 current account from the UK’s fifth-largest bank has previously been one of the better accounts around, paying 1.5 per cent interest on balances of up to £20,000 and up to 3 per cent on several types of household bills, in return for a £5 monthly fee.
However, from May, the interest rate will be cut by a third to 1 per cent and cashback capped at £15 a month, a cap which also affects the bank’s £1 a month 123 lite account and its select and private bank accounts.
3 to 1: Santander’s 123 Current Account previously paid 3% interest on balances of up to £20,000. In May, it will have been reduced to just 1%, worse than many easy-access accounts
Holders currently get 1 per cent back on water bills, council tax bills and Santander mortgage payments, 2 per cent on gas and electricity bills, Santander home and life insurance premiums, and 3 per cent on mobile and landline bills, broadband and TV packages.
The cashback available from each of these three ‘tiers’ will be capped at £5 a month.
Last year, This is Money and comparison site uSwitch worked out the average cashback you could expect to earn if you spent £401.43 a month on bills was £87.81, before taking into account monthly account fees.
Someone paying this much would be unaffected by the annual cashback cap of £180.
But the interest rate cut to 1 per cent will mean a £100 hit on interest for those holding the maximum balance of £20,000 and is likely to make the 123 account less attractive.
It means you would now earn £200 on the maximum balance. Previously, this would have been around £300.
The account paid 3 per cent on balances of up to £20,000 from launch in 2012 until 2016 when experts described it as the ‘best current account’ available.
This meant £600 in annual interest. The rate was cut in half in November 2016.
It also had a lower £2 monthly fee before this was moved to its current £5 outlay.
It means customers who have been around for both cuts will now earn £400 less in interest than they did before the first reduction.
When Santander made the cut in 2016, it partly blamed the base rate cut from 0.5 per cent to 0.25 per cent.
However, the Bank of England base rate has risen twice since to 0.75 per cent.
Fanfare: The 123 current account launch had a number of big sports stars, including golfer Rory McIIroy
When Santander launched the 123 account, it spent millions on adverts for the account featuring sports stars such as Olympic gold medallist Jessica Ennis-Hill and champion golfer Rory Mcllroy.
It managed to snag a huge number of customers who chose to switch to it.
For example, in the summer of 2015, it managed a net gain of 51,000 people who used the current account switching service to take advantage.
This was nearly five times as many as its closest rival, indicating just how popular the account was in its peak. It is likely many of these customers are still with it.
A report suggested the account was costing it £1billion a year to run with that original 3 per cent interest rate.
Nearly four million people had opened the account between 2012 and 2016, enticed by the very competitive interest rate and chunky cashback.
The offering was so good, that many savers used the current account for their savings as the rate offered is better than most savings accounts
The latest cut comes as easy-access savings rates continue to fall, meaning the bank account was one of the few places savers could still get 1.5 per cent interest without tying up their money.
The changes mean the best easy-access rate, currently 1.36 per cent from Cynergy Bank, will now beat 123 once more.
Santander defended the changes as being down to the impact of regulations and persistently low interest rates.
Susan Allen, head of retail banking at Santander, said: ‘While we have had to make some difficult decisions in the current environment, our current account range remains very competitive.
‘Our 123 accounts provide a range of benefits that we know our customers value and our goal is to ensure these accounts remain sustainable for the future.’
It adds that its flagship account continues to offer ‘great value’, with customers able to earn up to £379 per year in interest and cashback for an account fee equivalent to £60 a year, while 123 lite customers can earn up to £180 a year in cashback for a fee of £12 a year.
|Bank account||Old overdraft rate||New rate||Fee-free buffer?|
|HSBC Advance||17.9%||39.9%||Yes – £25|
|First Direct First||15.9%||39.9%||Yes – £250|
|M&S Bank||15.9%||39.9%||Yes – £250|
|RBS/NatWest Select||19.89% (plus £6 monthly fee)||39.49%||No|
|Monzo||50p per day above £20||19%/29%/39%||No|
|Barclays Bank Account||Tiered rate||35%||Yes – £15|
What about the overdraft changes?
The bank also announced a move from a tiered daily fee overdraft to a flat rate, which it will set at 39.9 per cent from 6 April, the same rate as HSBC, First Direct and Nationwide.
Currently the bank charges £1 a day on borrowing below £2,000, £2 a day on borrowing between £2,000 and £2,999 and £3 a day when borrowing more than £3,000.
This means someone borrowing £250 for three days currently pays £3, someone borrowing £600 for four days £4, and someone going £1,200 in the red for six days £6.
Following the changes, the same borrowing would cost 69p, £2.21 and £6.64, respectively.
The bank said anyone using an unarranged overdraft of less than £1,065 will pay less under the changes.
Santander also offered a glimpse of the potential future of overdrafts, offering a choice account which provides a lower interest rate of 29.9 per cent and a maximum monthly charge of £20, in return for a £10 monthly fee.
However, it is unlikely this account would be worth it unless you spend a lot of time in the red.
For example, borrowing £250 for four days with the account would save you just 15p compared to the 39.9 per cent interest rate.
The overdraft changes have come into force as a result of a regulatory crackdown on unarranged borrowing, which banks have reacted to by hiking arranged overdraft rates.
However, customers of those banks which previously offered tiered overdraft charges, like Santander and Barclays, may find themselves paying less on occasion.
What you can do if you’re unhappy with the changes
Santander’s latest changes to the 123 account might be a step too far for some and they may be looking to switch.
Unfortunately, no bank offers the same combination of in-credit interest and cashback that the 123 account does, so you might have to decide which you consider more important.
If you’re after in-credit interest, you have two options. Nationwide’s FlexDirect account is perhaps the better one, offering 5 per cent interest for the first 12 months after opening the account on balances of up to £2,500, provided you pay in at least £1,000 a month.
This would give you £127.90 after one year in interest. But it is not ideal for those with north of £2,500 to tuck away.
Go elsewhere? Nationwide’s FlexDirect account pays 5% interest on balances of up to £2,500 a year, while other banks offer cash switching offers
The other option is Lloyds Bank’s Club Lloyds option. If you pay in £1,500 each month you don’t have to pay a £3 monthly fee, and it gives you 1 per cent interest on balances of up to £4,000, and then 2 per cent interest on a final £1,000 between £4,000 and £5,000.
However, that only works out at £60 a year in interest.
In both cases, the fact that both banks have a lower interest-paying limit than Santander means you could take the other £17,500 or £15,000 spare and put that in an easy-access account from Cynergy Bank – paying 1.36 per cent – or Marcus Bank – paying 1.35 per cent.
The final option is to take advantage of HSBC or First Direct’s switch incentives.
The £175 you earn with HSBC is more than you’d earn in a year of interest with Nationwide and just £25 less than 1 per cent interest on the full £20,000 Santander 123 allowance, while you can still stash the rest of the money away in a savings account and earn even more.
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