Controversial new overdraft rules come into force today which would have seen some banks increasing overdraft rates to nearly 40 per cent.
The changes, announced before the coronavirus outbreak, mean banks can only charge one single annual interest rate for both arranged and unarranged borrowing.
But with more households’ under financial strain thanks to Covid-19, some are temporarily freezing rates at lower levels or rolling them back down to what they had been before they were increased.
Banking changes: New overdraft rules come into play today – but many of the big banking names have temporarily suspended up to 40% interest until later in the year
The measures announced last year by the Financial Conduct Authority had seen many banks peg their new single overdraft rates at around 40 per cent – around double the rate some borrowers had previously been paying to use their arranged overdraft.
The FCA has subsequently asked for clear guidance as to how all of the major banking names came up with rates around the same level after a public outcry.
As well as the temporary freeze, many are also ramping up their zero-interest overdraft buffers, so borrowers may not pay anything in the short-term.
From Thursday, the FCA is expected to force banks to all offer short-term £500 buffers to help cover bills.
HSBC is temporarily halving its new 39.9 per cent overdraft rate, taking it back down to 19.9 per cent.
From April 9 for a three-month period, HSBC will also automatically increase its temporary interest-free buffer for millions of Bank Account and Advance Account overdraft customers to £500.
| Bank account | Old overdraft rate | New rate for majority | Fee-free buffer? |
|---|---|---|---|
| Nationwide FlexAccount | 18.9% | 39.9% | No |
| 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 |
| Starling | 15% | 15%/25%/35% | No |
| Barclays Bank Account | Tiered rate | 35% | Yes – £15 |
| Santander | Tiered rate | 39.9% | No |
| TSB | 19.84% (plus £6 monthly fee) | 39.9% | No |
| Lloyds/Halifax/TSB | Tiered rate | 39.9% (27.5% for Club Lloyds customers) |
Yes – £50 |
NatWest has frozen overdraft interest at current rates for personal customers for at least three months.
The temporary relief available for overdraft customers affected by the coronavirus outbreak varies between providers.
The new industry rules coming into force aimed to make overdraft pricing simpler and fairer according to the FCA, reducing the burden on some customers who have previously been paying high charges.
Firms will need to charge a simple annual interest rate – without additional fees and charges for using an overdraft.
The new rules should particularly help people who have paid high charges in the past for going into an unarranged overdraft.
The FCA previously found that unarranged overdraft fees are often 10 times as high as charges for payday loans and fall disproportionately on vulnerable consumers.
The regulator’s calculations suggested the cost of borrowing £100 through an unarranged overdraft would fall from a typical £5 per day to under 10p per day.
It also said in January that it expects firms to help people who borrow large amounts within their arranged overdraft, which could include reducing or waiving interest or agreeing a repayment programme.
What is your bank doing?
Here is a round-up of what major providers have already announced about their new overdraft rates and the measures put in place for giving temporary relief to borrowers affected by coronavirus:
Barclays
New rate: A rate of 35 per cent took effect on March 22.
Overdraft relief: Barclays is waiving all overdraft interest from March 27 until the end of April 2020, meaning no charges for customers to use their agreed overdraft. Interest will automatically be removed.
Barclays is reviewing measures after this date and will be communicating with customers shortly.
Co-operative Bank
New rate: A rate of 35.9 per cent was due to come into force on April 4 – but this has been delayed until July 3.
Overdraft relief: Customers with an existing arranged overdraft will have the interest waived on up to £500 of arranged overdraft use until July 3.
HSBC UK
New rate: HSBC imposed a new rate of 39.9 per cent on March 14. But it is now temporarily reducing the rate charged above its interest-free buffer to 19.9 per cent.
Overdraft relief: Alongside the rate reduction, HSBC said from April 9, for a three-month period, it will increase the temporary interest-free buffer for millions of Bank Account and Advance Account overdraft customers from £300 to £500.
Lloyds Banking Group
New rate: The majority of customers will pay 39.9 per cent (29.9 per cent for Club Lloyds). As the group takes a ‘risk-based’ approach to overdrafts, some customers will pay 49.9 per cent.
Overdraft relief: All customers will be able to have a £300 interest-free buffer from April 6 to July 6.
As a result of this, Lloyds said all its overdraft customers would pay less from April 6. It said 90 per cent of customers would have paid less for their overdraft even if the £300 buffer across its accounts was not introduced.
Nationwide Building Society
New rate: Nationwide introduced a 39.9 per cent rate in November 2019.
Overdraft relief: The Society will not charge overdraft interest from April 20 until July 1 for those financially impacted by coronavirus.
Customers can request a fee-free overdraft interest holiday by completing an online form. Nationwide will email or text to acknowledge requests.
NatWest Group
New rate: A rate of 39.49 per cent would have been introduced on April 1 for NatWest customers, and on March 30 for RBS and Ulster Bank customers.
But customers will continue to pay their current rate of interest for at least three months, meaning a maximum of 19.89 per cent across arranged and unarranged borrowing.
Overdraft relief: As well as the rate freeze, the bank has also removed all other overdraft fees and charges, so all customers who use their overdraft for the three months from March 30 will pay less.
Santander
New rate: Santander previously announced it will be 39.9 per cent from April 6, however it plans to make a further statement in due course.
Overdraft relief: Santander previously announced a £350 interest-free overdraft buffer for three months from April 6. This means it will automatically waive interest on up to £350 of any agreed overdraft limit.
Santander said last week: ‘We will be reviewing the FCA proposals as a matter of priority and will be announcing new measures to help our customers as soon as possible.’
TSB
New rate: TSB previously announced a rate of 39.9 per cent.
Overdraft relief: TSB has introduced measures including fees waivers or implementing an interest freeze on their overdraft.
It is looking to make changes to align with FCA’s guidance, effective by April 9.
THIS IS MONEY’S FIVE OF THE BEST CURRENT ACCOUNTS
Santander’s 123 Lite Account will pay up to 3% cashback on household bills. There is a £1 monthly fee and you must log in to mobile or online banking regularly, deposit £500 per month and hold two direct debits to qualify.
NatWest’s Reward Silver Account offers a £175 switching incentive to new and existing customers as well as insurance cover for European travel. Customers can also earn rewards which can be redeemed as cash or gift cards.
Club Lloyds’s Current Account offers benefits such as cinema tickets, magazine subscriptions and dining cards to current account holders. There is no cost if you pay £1,500 each month, otherwise a £3 fee applies. Must hold two direct debits to earn monthly credit interest.
HSBC’s Advance Account offers £175 cash if you switch to it. The account comes with a £1,000 starting overdraft and 2.75% regular saver account. There is no monthly fee, however you must deposit £1,750 per month into the account.
Nationwide’s FlexDirect account comes with 5% interest on up to £2,500 – the highest interest rate on any current account – if you pay in at least £1,000 each month, plus a fee-free overdraft. Both perks last for a year.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.