Santander 123 Account Interest Rates Changing – What Now?

Santander 123 Logo

I don’t usually skip straight past the irrelevant info and offer pop-ups when logging in to my online banking, such as the ever-loving “exclusive lifetime insurance offer just for me”. However, the very recent “Santander are changing their interest rates and cashback on the 123 Current Account” certainly had my full attention! The interest rate was the initial reason for switching and the cashback advantage was why my partner and I took out my mortgage with them! 

Santander announced on the 14th January that they will be reducing the interest rates and cashback on the 123 Current Account from the 5th May 2020.

What does all this mean? Well, it means all of us with the 123 account have just under 4 months to take full advantage of the current interest rates whilst looking for the next best thing!

Why are they changing their interest rate?

Santander have said they are changing their interest rates due to several reasons, including the industry’s continual, relentlessly low interest rates and an increased pressure on the Current Account market from banking regulations. One of which is the change to overdrafts where all banks must charge all customers a single interest rate, implemented by the Financial Conduct Authority. The regulation being, banks will have to charge the same rate for unarranged overdrafts as they do for arranged, starting April 1st 2020.

Susan Allen, Head of Retail Banking at Santander, said: 

“While we have had to make some difficult decisions in the current environment, our current account range remains very competitive. Our flagship 1I2I3 Current Account continues to offer great value, with customers able to earn up to £379 per year in interest and cashback for an account fee equivalent to just £60 a year, while 1I2I3 Lite customers can earn up to £180 a year in cashback for a fee of just £12 a year.”

“Our 1|2|3 accounts provide a range of benefits that we know our customer’s value and our goal is to ensure these accounts remain sustainable for the future.”

What is the interest rate on the 123 account changing to?

Firstly, in order to qualify for this account, you need to pay in a minimum of £500 a month from any other source (excluding any Santander personal account you’re named on), have two active direct debits, and be over 18 and living in the UK. You then have to pay £5.00 a month for the privilege.

And to answer the question, the interest rate on the 123 current accounts presently stands at 1.49% on all balances up to £20,000 but will drop to just under 1% after the 5th May 2020.

Also, the cashback earned on household bills will be capped at a maximum of £5 a month for each of the below categories. This means you will only be able to earn a maximum of £15 in total. This cap also carries over to the 123 lite account.

1% Santander Residential Mortgages, Water, and Council Tax
2%Gas and Electric
3%Broadband, TV packages, Mobile, and home phone
Santander 123 Account Cashback Rates

Even though rates are being slashed, the monthly account fee will remain the same.

How much can you earn after 5th May 2020?

As Susan Allen put it, the maximum you can earn on the 123 Account is £379 a year, which is based on the premise that you have a minimum of £20,000 in your account as well as meeting the maximum threshold for each of the above categories.

For ease of understanding, let’s break this down:

  • Just under 1% interest on a balance of £20,000 a year = £199.09
  • £15 from cashback a month * 12 = £180
  • Account fee of £5 a month * 12 = £60
  • £199.09 + £180 = £379.09 – £60 = £319.09

So once you minus the account fee, the maximum you can actually earn from the account after May 2020 is just over £319 a year, or £26.60 a month – still better than a smack in the mouth.

What are the alternatives?

There are a few alternatives that you can switch to before the change comes into play, however, it is worth noting that many do not meet the thresholds of the above anyway and won’t be affected much / at all by the caps. The only effect would be felt by the interest rate decrease. It also comes down to your own, individual circumstances.

With that in mind, the alternatives include:

Santander 1|2|3 Lite Account

If you do not have a substantial enough amount in your account to balance the monthly fee to interest ratio but still have many household bills, the lite account may be more suitable for you. At only £1 a month, you can still receive the same cashback rates as the standard 1|2|3 accounts, but just won’t receive any interest.

Nationwide FlexDirect

Just like the above, if you have a lower balance where the ratio does not add up, the FlexDirect account pays up to 5% on balances up to £2500 for a year, dropping to 1% after this (where you can seek a better deal). With no monthly account fee, the only eligibility is that you pay in a minimum of £1000 a month and have not had an account before. Got a friend with a Nationwide account? Have them “refer” you and you can both get £100 each – Bonus!

First Direct

If you have minimal household bills or don’t have any at all (lucky you!), but have a large balance, switching to FirstDirect could be a great move. With no monthly fee, you’ll receive £100 cashback for switching if you are a new account holder, and to qualify, you simply have to pay in a minimum of £1000 in the first three months of opening the account. Then open up a linked regular saver to get a whopping 2.75% interest.

Barclays Blue Rewards

Don’t have much in the way of household bills nor savings but have direct debits? Opening a Barclays current account and add the Blue Rewards may be much more suitable. All you need to do is pay in £4 a month and have at least two direct debits – this way you’ll instantly get a minimum of £7 cashback a month. And if you have a Mortgage, Home Insurance, Loan, or Life Insurance with Barclays, you can pocket a further amount of £14 a month, maximum. 

Failing that, you can move over to a basic account with no account fees or other requirements!

Frequently Asked Questions

How to change Santander 123 to Santander Lite?

There are two ways to convert your 123 account to a Lite account. The first is to log on to online banking and click on the Upgrade Current Account link in the bottom right corner. The second is to phone customer services on 0800 9 123 123.

How many Santander 123 Accounts can I have?

You can have a maximum of two 123 accounts, One account for your sole use and another account for joint use (e.g. with your partner), where both need a minimum of £500 paid in monthly

What is the interest rate on a Santander 123 account?

As of the 5th May 2020, the interest rate on the 123 account is just under 1% on balances up to £20,000. Cashback rates are also capped at a maximum of £5 for each 123 category.

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