Santander current account customers first to see interest rate cut

Interest rate on flagship account cut by half

Updated: 

Current account customers with Santander will see their interest rate halved from Tuesday - as other providers prepare to follow suit with an onslaught of rate cuts.

From November 1, Santander's flagship 123 current account will pay a single interest rate of 1.5% on balances up to £20,000. Previously, customers could get a rate of up to 3% with the deal, if they had at least £3,000 saved.

Around four million customers hold a 123 current account - some of whom will be better off as a result of the move.

The account previously had a tiered rate of interest, depending on how much money was in it, and the new flat rate will mean customers with balances below £2,000 are earning more interest than they had previously. But those with £2,000 or more in the account will be on a worse rate.

Previously, the account has paid 1% on balances of £1,000 or more, 2% on balances of £2,000 or more and 3% on balances of £3,000 or more, with the rate applying to the entire balance.

When it announced the rate cut in August, Santander said the changes were due to "the market expectation of interest rates staying lower for longer".

Santander has been seen as one of the big "winners" of the industry-wide current account switching service, which was launched in 2013 to make it easier for people to ditch their old current account provider and move to a new one.

Good interest rates and perks offered with current accounts generally have made it an attractive place for savers to stash their cash, at a time when interest rates on traditional savings accounts have been poor.

But in a blow for those looking for better returns, the rates or perks on several current accounts are set to be chopped down in the coming months, following the recent cut in the Bank of England base rate to 0.25%.

As well as Santander's rate cut, Lloyds Bank will also cut its Club Lloyds credit interest rate from 4% to 2% in January and TSB will also reduce a 5% rate on its Classic Plus account to 3% from January. And Halifax will drop its £5 monthly reward payment on its Reward current account to £3 in February.

Rachel Springall, a finance expert at Moneyfacts.co.uk, said Santander's rate cut will be "devastating" for savers.

She said: "This change has been a green light for other banks to consider their own incentives and sadly, more banks are making the same move to slash the account perks."

Figures from payments body Bacs show Santander made a net gain of over 17,000 customers moving to it using the current account switching service between January 1 and March 31 2016.

Ms Springall continued: "There is still some interest to be gained from the best high-interest current accounts, and they may still prove a refuge in this low rate environment, but consumers will have to ensure they are earning enough to justify the account, particularly if it charges a monthly fee.

"Nationwide is still paying 5% on its FlexDirect account on balances of up to £2,500 for 12 months, and Tesco Bank continues to pay 3% on balances of up to £3,000 on its current account."

Santander has already recently hiked the monthly fee that comes with the 123 account. In January 2016 Santander increased the fee on its 123 account from £2 to £5 a month. Plans for the fee increase were confirmed in September 2015.

Its customers will continue to earn cashback on household bills as they did before.

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