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NatWest and RBS to hike overdraft interest rates – but many will actually pay less as fees are scrapped

NatWest and RBS to hike overdraft interest rates – but many will actually pay less as fees are scrapped

NatWest and RBS have become the latest banks to announce a steep hike in the interest charged on overdrafts, with some customers set to pay 39.49% from late March or early April. But the banks are also scrapping daily and monthly fees currently charged for overdrafts, meaning many will end up paying less overall to use them.

Here are the three key changes which have been announced:

  • Arranged overdraft interest rates will rise for most – but the fee will be scrapped. At the moment, NatWest and RBS customers are charged up to 19.89% interest on arranged overdrafts, as well as a £6/month flat fee on most accounts. But from late March or early April this will change across seven current accounts offered by both banks – the flat fee will be scrapped, and the interest charged will vary from 19.49% to 39.49%, with most accounts charged the higher rate.

  • Unarranged overdrafts will cost the same as arranged overdrafts. Currently, customers pay a hefty flat fee of £8 per day – this will be scrapped. Instead, you'll pay the same interest rate as you would on an arranged overdraft, capped at £20/mth.

  • Overdraft buffers will also be scrapped on almost all accounts. Currently, these let you go into your arranged or unarranged overdraft by between £10 and £500 (depending on the account) without incurring fees or interest – but this will no longer be the case. The only exception is for the NatWest and RBS graduate account, which will keep its buffer of up to £2,000.

A spokesperson for the banks said the majority of NatWest and RBS customers will pay the same or less to use their overdraft as a result of the changes, though it will depend on your account, the size of your overdraft and how long you use it for – see our analysis below. No changes to overdraft charges have yet been announced at Ulster Bank, which is part of the same group as NatWest and RBS.

Under new rules which come into effect in April, banks must scrap unarranged overdraft fees, and charge a single interest rate for arranged overdrafts. The move by NatWest and RBS comes after similar announcements from NationwideHSBC, First Direct and M&S Bank, which all hiked their overdraft interest rates to 39.9%.

If you've got an overdraft, see our Cut Overdraft Costs guide to see if you can get costs down, even as low as 0%. If you're struggling, see Martin's blog: Are you an overdraft prisoner? How to escape it.

How are overdraft charges changing for each account?

NatWest and RBS will be scrapping usage fees on all accounts, along with fee-free buffers on all but the graduate accounts. Instead, you'll be charged a single interest rate for both arranged and unarranged overdrafts.

How the interest rate on your overdraft will be changing will depend on which account you have (all those below are offered by both NatWest and RBS).

How arranged overdraft charges are changing

Account  Interest rate Monthly fee Date of change
  Current After changes Current After changes  
Select 19.89% 39.49% £6 None 31 Mar RBS, 2 Apr NatWest
Reward / Premier Reward 19.89% 39.49% £6 None 30 Mar RBS, 1 Apr NatWest
Reward Silver 19.89% 39.49% £6 None 30 Mar RBS, 1 Apr NatWest
Reward Platinum  19.89% 39.49% £6 None 30 Mar
Reward Black 14.89% 19.49% £6 None 30 Mar
Premier Select 19.89% 19.49% £6 None 31 Mar RBS, 2 Apr NatWest
Graduate (1) 17.81% NatWest, 9.9% RBS 39.49% None None 27 Mar

Rates and fees on NatWest and RBS student accounts won't be changing. (1) Unlike the other accounts, the graduate accounts will retain a buffer of up to £2,000.

With unarranged overdrafts, after the changes you'll pay the same interest rate as that for arranged overdrafts shown in the table above, but no flat fee. You'll pay a maximum of £20/mth on unarranged overdrafts, down from a monthly maximum of £80/mth at the moment.

Will I pay more or less to use my overdraft as a result?

The maths on this is a bit tricky, as there are lots of different variables which will determine whether you win or lose as a result of the changes – such as which account you have, the type and size of your overdraft, and how long you stay in the red.

In general, if you only occasionally dip into your arranged overdraft you're likely to be better off under the new system (unless you usually only borrow within the interest-free buffer, which is being scrapped on most accounts). People with very large arranged overdrafts or who spend a long time overdrawn are likely to pay more.

While RBS and NatWest haven't yet provided a calculator for the new charges so you can compare, we've crunched the numbers on the Select or Reward accounts, for an arranged overdraft for seven days in a monthly period:

  • An overdraft of less than £10 will be more expensive after the changes, as you will now need to pay interest on this borrowing – whereas at the moment, you pay nothing due to the interest-free buffer.

  • An overdraft of between £10 and about £1,250 will be cheaper after the changes, as the higher interest rates will be offset by you not having to pay pricey usage fees.
  • An overdraft of more than about £1,250 will be more expensive after the changes, due to the impact of the higher interest rate.

Remember though that this example only applies to certain accounts, and for overdraft borrowing over a seven-day period – so whether you're a winner or loser from the changes will depend on your individual circumstances. 

'Many will pay less – but a 39.49% rate is still staggeringly expensive'

Helen Saxon, banking editor at MoneySavingExpert.com, said: "Announcements about borrowing interest rates going up usually fill customers with dread. But the removal of the monthly overdraft fee will actually mean some RBS and NatWest customers will pay less.

"For example, someone who used an arranged £100 overdraft for seven days in a monthly period on their Select account is currently paying £6.35 in fees and interest. But after the changes come into effect, that person will pay around 65p for the same borrowing.

"However, while the changes mean many will pay less, a 39.49% interest rate is still staggeringly expensive. Sadly RBS and NatWest are just the latest in a long list of banks to move rates to around 40%, following the regulator's call for easier-to-understand charges. So if you're regularly or always in your overdraft – whichever bank you're with – use these changes as a wake-up call to get out of it."

How to beat the rate hikes

If you're currently paying to use your overdraft, there are different ways you can cut the cost. Your options will generally depend on how big your overdraft is:

  • Overdraft of up to £500? Consider switching to the First Direct current account*, which offers many a £250 interest-free overdraft, and currently also pays a £100 switching bribe. So if your overdraft's up to £350, it pays some off and the rest is interest-free.

    On any overdraft borrowing above this up to a standard arranged overdraft limit of £500, you'll pay 39.9% interest (though this is after First Direct's changes come into effect – until 14 March 2020 you'll pay 15.9%). But even so, you'll still likely save by only paying interest on part of your overdraft.
      
  • Overdraft of up to £1,500ish? The Nationwide FlexDirect* account offers a year's 0% overdraft, as long as you haven't had a FlexDirect account before – and if you get a friend with a Nationwide account to refer you before you switch, you'll both receive £100.

    There's no guaranteed overdraft limit though, as it'll be based off your credit score – so while it could be bigger than the £250 at 0% offered by First Direct, it could also be smaller than your current limit.

    And remember that the 0% rate will only last for 12 months after you open the account, so you should see this as a temporary respite to sort out your finances. Once the year's up, you'll be charged 39.9% interest on the entire overdraft.

  • Very large overdraft? If your overdraft is larger still, it's unlikely you'll be able to cover all of it with a 0% bank deal, but a few specialist credit cards offer '0% Money Transfers'.

    This is where, for a one-off fee of around 3-4% of the value of the transfer, the card pays cash into your bank account. You can use this to clear your overdraft, so you owe the card instead at 0%. You can currently get up to 28 months at 0%. For a full rundown, see the Money Transfers guide.

For full help, see Martin's Overdraft prisoners blog and see our How to cut your overdraft costs guide.

What do the banks say?

A NatWest spokesperson said: "We have undertaken extensive customer research and have created an overdraft proposition that is simpler and easier for customers to understand.

"The majority of our customers that use their overdraft will pay the same or be better off as a result of these changes. We've been working hard to make sure that we have the right support in place for any customers who are negatively impacted by these changes."