Santander increases interest rate on its popular 123 current account to 0.5%

Santander has today announced that it is upping the in-credit interest rate on its popular 123 current account for the first time after a series of cuts over the years.

Current account customers will see interest they receive increase from 0.3 to 0.5 per cent from 28 March, on balances up to £20,000.

This means that someone who maintains a balance of £20,000 in their current account could earn up to £100 over the course of a year.

Although it is a far cry from the 3 per cent interest that customers enjoyed when the popular 123 account launched in 2012, it marks the first time in years that rates have actually edged upwards. 

Over a period of five years, Santander 123 customers have seen the in-credit interest fall from 3 to 0.3 per cent.

The interest rate rise will also take effect for those with Santander’s Select account and Private current account.   

Will it entice switchers?

Anyone considering switching to Santander’s 123 account should be aware that the in-credit interest is not it’s biggest draw.

Switchers will also benefit from its £140 switching offer and up to 3 per cent cashback on selected household bills, making it an overall package to be reckoned with. 

However, customers need to be aware the 123 account charges a £4 monthly account fee which equates to £48 over a year.

In terms of in-credit interest, Santander’s new rate could mean up to £40 extra interest each year for its current account customers.

But it falls short of competing with Virgin Money’s offer at present. 

Virgin Money’s current account customers have access to a market leading linked savings rate of 1 per cent on balances up to £25,000. 

For balances above £25,000, the rate is 0.5 per cent. This cash can be withdrawn at anytime.

This means a Virgin current account customer with £25,000 stashed away in its linked saving account will earn £250 in interest over the course of one year.

Those switching to Virgin’s Money M Plus account, which has no monthly charge, will also benefit from interest of 2.02 per cent on current account balances up to £1,000. 

This means you’d get a £20 return, or put another way, one fifth of Santander’s maximum £100 return for keeping just one twentieth of balance required to secure it.  

Other than Virgin’s lucrative offer there are other in-credit offers that may prove more lucrative for current account customers with smaller balances.

Nationwide pay 2 per cent interest up to £1,500 to its FlexDirect customers meaning it’s possible to earn £30 interest over the year by maintaining the maximum balance. There is no account charge.

Lloyds pays 0.6 per cent on balances up to £4,000, and 1.5 per cent on £4,000 – £5,000 for those signing up to its Club Lloyds account. This could equal up to £39 interest over the course of the year. 

Its £3 monthly account charge is reimbursed so long as you pay in £1,500 each month into the account and pay out two monthly direct debits.

However, at a time when in credit interest is so low, with most providers offering next to nothing, there are other perks that could be more important.

For example, currently a whole host of banks are offering cash switching offers to new and existing customers.

NatWest, RBS and First Direct are offering £150, Santander is offering £140 cashback while Nationwide is offering a £100 incentive to new joiners and £125 to Nationwide members for switching account.

Santander has also increased the rates on a number of mortgage deals by as much as 0.3 percentage points in recent weeks in response to the Bank of England base rate rising to 0.5 per cent. 

It is also one of the banks still paying 0.01 per cent on easy-access savings accounts. 

You can find out whether the 123 account might be the right current account for you by reading our guide on the best deals.