Santander is taking an axe to its flagship 123 current account by chopping the headline interest rate in half later this year, MoneySavingExpert.com can reveal.
In a major blow for millions of customers, the market-leading 3% interest for those with savings of between £3,000 and £20,000 is being slashed to just 1.5% from 1 November for new and existing customers.
Santander 123 cut to 1.5% – should you ditch it?Read Martin's full 'ditch or keep' analysis
The 1.5% rate will apply on all balances from £1 to £20,000, as Santander is removing its current tiered structure whereby you earn less than 3% on balances below £3,000, and nothing below £1,000. For those with £20,000 saved, interest earnings will plummet from roughly £600 to £300 a year.
The key immediate message to anyone with a Santander 123 current account is not to switch in anger now, because the 3% rate holds until November, and the chances are many other providers could also drop their rates. We will update you on the latest for Santander 123 customers via our weekly email.
The bank will make an official announcement of the cut on Monday morning, and will then begin writing to customers to give them the required minimum 60 days' notice. It is understood the bank is cutting rates because of the market expectation of low interest rates for many months, making the 123 account unprofitable at 3%.
After the Bank of England this month cut the base rate – which underpins many savings and borrowing rates – from 0.5% to a historic low of 0.25%, Santander said its current account rates were "under review". Now we know the key result of that review.
The 123 current account also comes with a £5 per month fee – it rose from £2/month in January – and pays up to 3% cashback on bills. Those features will remain. The only significant change to the account this November is the slashing of the interest paid.
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'Kick in the teeth'
MSE founder Martin Lewis says: "Many millions of savers across the UK will feel like they've been kicked in the teeth. Santander 123 has been a beacon, shining out for those with a decent chunk of cash, as at 3% it pays decent interest. Now it's halving that, meaning for those with £20,000 saved, it drops from roughly £600 to £300 a year.
"However, the most important warning for existing Santander 123 savers is don't close it in anger now. Not just to grab the next two and a half months of high interest, but because, unfortunately, it is likely Santander is just at the vanguard of rate cuts. Its main competition, the other banks with high interest accounts, may well cut those too.
"So wait until the change happens in November to see how it stacks up. After all, even at 1.5% interest, right now, for those with £10,000 to £20,000, it would still be the best-paying place for most to put easy-access savings in.
"It's worth noting, the likelihood is Santander has chosen to halve its rate not simply because of the recent base rate cut, but because there could be more to follow. Unlike normal savings accounts, high interest bank accounts don't change rate often, so it's likely to have factored in potential cuts so it will only have one big PR hit."
See Martin Lewis's Santander 123 cut blog for his full thoughts and what you should do.
Huge overdraft rate hike
A second blow will be delivered by Santander on 9 January next year when it hikes costs for those deep into their overdraft, on its 123 current account and Everyday account.
All customers currently pay £1 a day if in an arranged overdraft, which is already hugely expensive as it could mean £365-a-year charges if permanently overdrawn.
While this fee will remain in place if the overdraft is up to £2,000, it'll rocket in January to £2 a day on overdraft balances of £2,000 to £2,999 and to a whopping £3 a day if £3,000 or higher.
The £12 overdraft buffer, where no overdraft fees apply, will remain in place and all overdraft fees will continue to be capped at £95 per month, which is hardly something to cheer as you could still be faced with £1,000+ in fees.
Anyone regularly overdrawn on these Santander accounts should consider alternatives even before the hike. See our Cut Overdraft Costs help for more.