Santander 123 account halves interest rate: how much will you lose?A flat rate of 1.5% will apply from 1 November

15 August 2016


Santander will cut the rate on its popular 123 current account to 1.5% from November, which could see customers missing out on up to £300 a year in interest.

Britain’s most popular current account has offered a tiered system of interest since its launch in 2012, paying 1% interest on balances over £1,000, 2% on balances over £2,000, and 3% on balances from £3,000 to £20,000.

But from 1 November 2016, the 123 account will pay a flat rate of 1.5% to all customers – including those with a balance of less than £1,000, who previously would not have earned interest at all.

The news comes nearly a year after Santander announced it would increase the monthly fee on the account by 150%, from £2 to £5.

Find out more: make the most of high interest current accounts - how to boost returns by spreading your money across several accounts

How much interest will you lose out on?

Those who use the 123 account to earn interest on higher balances will be hardest hit by the rate cut. As a result of the changes, the maximum amount of interest customers will be able to earn in a year will fall from £540 to £240, once the monthly fee of £5 has been deducted.

The graph does not factor in the cashback you could get on household bills.

Cashback on household bills

Santander is the first of the interest-paying current account providers to slash rates following the Bank of England’s decision to cut the base rate to a record low of 0.25%.

However, there will be no change to the cashback that customers can earn on selected household bills. The bank will continue to pay up to 3% on various monthly bills paid by direct debit.

In July 2016, Santander launched a cheaper alternative to its 123 account. The 123 Lite current account charges a monthly fee of £1 and offers the same cashback scheme, but no interest on in-credit balances.

Changes to overdraft fees

In addition to the interest rate cut, the bank has announced a change to arranged overdraft fees on the 123 account from January 2017.

Instead of a flat fee of £1 a day, customers with an overdraft between £2,000 and £2,999.99 will pay £2 a day, and customers with more than £3,000 overdraft will pay £3 a day. The monthly overdraft fee cap will remain at £95.

This change will also apply to the Everyday Current Account.

Find out more: best bank accounts for authorised overdrafts - see which providers charge the least for dipping into the red

Is it time to switch? 

The graph below shows how much you'll earn from the Santander 123 account after the rate cut, compared to two alternative interest-paying current accounts.

The Nationwide FlexDirect account pays 5% on balances up to £2,500 for the first year, dropping to 1% thereafter. The TSB Plus Account pays 5% interest on balances up to £2,000.      

The Nationwide account will pay out more than the new Santander 123 account on balances under £12,333 - but only for the first year. The TSB account will pay out more on balances under £10,666. We'd recommend making the most of multiple high-interest current accounts to boost your returns even further.   

With each account, you'll have to meet certain terms in order to qualify for interest. Check the bank's website before switching to check if its current account is suitable for you.

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