Santander to cut interest rate on 123 account to 1%
Santander is to slash the interest rate on its popular 1|2|3 current account from May, and will also overhaul its overdraft rates.
From 5 May, the interest rate on the 1|2|3 – and the Select and Private current accounts – will be cut from 1.5% AER to 1% on balances up to £20,000.
This takes the maximum interest customers can earn to £199, before tax and its £5 monthly fee, down from £298.
Santander is also capping its household bill cashback at £5 for its three cashback categories on the 1|2|3 current account, 1|2|3 Lite, Select and Private current accounts, meaning customers can earn a maximum £15 per month: 1% on water bills, council tax and Santander residential mortgage payments; 2% on gas, electricity, Santander home insurance and life insurance; and 3% on mobile and home phone bills, broadband and paid for TV packages.
Santander confirmed there’s no change to its monthly fees or cashback categories.
It said the persistently low interest rate environment and the financial impact of regulatory changes in the banking industry are behind its decision. Letters will be sent out to customers this month explaining the changes.
It added it will provide alternative account options for the 2% of its current account customers who won’t gain enough returns above the monthly fee following the changes.
Time to switch?
Anna Bowes, co-founder of rate monitoring firm Savings Champion, said: “This is yet another blow to Santander customers, especially those who are using it as a savings account rather than as their main current account and it should be a move that makes them consider if they should switch.
“Given that there is a monthly fee of £5 on the 1|2|3 Account, if you maintain a balance of £20,000 then the £199 interest you would earn over 12 months is reduced by £60 – which equates to 0.70% AER. Far better easy access rates can be found elsewhere, so even if the current account is working for you, as it does offer cashback on some of your bills – although this too is being scaled back – it may be prudent to move your cash elsewhere. Rates of up to 1.40% can be found with an alternative provider.”
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 1|2|3 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.”
Overdrafts to be hiked to 40%
Santander is also bringing in a single interest rate on arranged overdrafts while removing all unarranged overdraft charges.
Currently, customers pay £1 a day on overdrafts under £2,000, £2 a day between £2,000 and £2,999 and £3 a day on £3,000+. From 6 April, arranged overdraft customers (on all adult accounts except Choice account) will pay 39.9% EAR, the equivalent of around 9p a day per £100 borrowed.
Santander said this will mean six out of seven overdraft customers (86%) will pay less than they do now. Typically, anyone using an arranged overdraft under £1,065 will pay less than they do today.
It will also remove all unarranged charges and paid item fees. All unpaid item fees were removed in December 2019.
Choice Account customers will see a lower 29.9% EAR for arranged overdrafts, with interest capped at £20 a month. It comes with a monthly charge of £10 which means customers will pay a maximum of £30 per month.
Allen, said: “We know that helping people manage their day-to-day finances effectively goes beyond simplifying overdraft pricing. We have a range of support services in place – from our over-the-phone experts to our in-branch workshops – and would encourage any customer who would like help in understanding the impact of these changes, or any other aspect of managing their money, to get in touch.”
Santander is the latest bank to hike overdraft rates in response to new rules from the Financial Conduct Authority.
From April 2020, banks and building societies will be required to stop charging customers higher prices for unarranged overdrafts in comparison to arranged overdrafts and they will not be allowed to charge fixed daily or monthly overdraft fees.
The overdraft fee hikes are an undesirable side effect of the regulator’s rules.