Santander cuts interest rate on its 123 current account again

Holders of Santander’s 123 current account will see the interest paid on their balances halved from April as the bank makes yet another cut to its flagship offering.

Customers will earn just 0.3 per cent interest, down from 0.6 per cent currently and from 1.5 per cent this time last year – although the bank has not made any cuts to the cashback it pays customers this time.

It capped the cashback customers could earn at £15 a month last May and altered it further in October by offering customers a higher percentage cashback on cheaper bills.

Santander has cut the fee on the account, from £5 to £4, to coincide with the latest changes, which happen on 12 April, but it means the interest paid on balances has fallen by 80 per cent while the fee has fallen by only a fifth over the same period.

Santander has announced the third interest rate cut to its 123 current account in the last 12 months

And in five years the flagship current account, which had helped the bank sign up 4million customers in an assault on Britain’s banking landscape, has seen the in-credit interest paid to customers fall from 3 per cent to 0.6 per cent.

The latest cut means even the reduced fee would eat into the interest to the extent that the maximum amount that could be earned, close to £60, would be reduced to around £12 after the fee, although this does not take any cashback into account.

The maximum that can be earned after the £48 annual fee is taken into account is now just £192, down from £420 when the account cost £5 a month but paid 1.5 per cent.

Santander’s 123 Lite account, which costs £2 a month and pays cashback but no interest, will not be changed.

The account can now be beaten by eight easy-access savings accounts in This is Money’s best buy tables, which pay up to 0.5 per cent, meaning those with the full £20,000 balance could earn more money elsewhere without paying a fee.

Someone with £20,000 would earn around £100 a year in interest if they deposited it into Aldermore’s market-leading easy-access account, roughly £40 more than with Santander.

Britain’s third-largest mortgage lender and fifth biggest bank blamed record low base and savings rates for the latest cut, the third to the interest rate in the last 12 months and the fourth change to the account in total.

The previous cuts helped boost its income by 16 per cent between July and September last year, compared to the previous three months, and improve its margin, but the bank is grappling with falling profits as a result of the coronavirus pandemic and low interest rates.

Its pre-tax profits fell from £785million in the first nine months of 2019 to £319million in the same period last year.

Nationwide Building Society and Lloyds Bank also made cuts to current account interest last year, while some banks including Tesco Bank and TSB have stopped paying current account customers any interest at all.

Susan Allen, head of retail and business banking at Santander, said: ‘With the Bank of England base rate remaining at its lowest level on record, and significant recent reductions in interest rates on current and savings accounts across the industry, we have taken the difficult decision to reduce the interest rate on our 123, select and private current accounts.

‘However, by lowering the monthly fee, we’ve ensured the accounts continue to provide customers with long term, everyday value, and Santander remains the only bank to offer both in-credit interest and cashback on household bills.’ 

The best interest rate on offer by a current account comes from Nationwide, even after its cut last year. 

Its FlexDirect account pays 2 per cent interest on up to £1,500 for the first 12 months, provided customers pay in £1,000 a month.