Lloyds Banking Group and Santander have put savers on notice that they face cuts to interest rates as the two high street banks attempt to shore up profits in the wake of the Bank of England’s post-Brexit-vote stimulus package.
Spanish-owned Santander is slashing the rate of interest on its highly popular 123 current account by half, in a move that will hit more than 500,000 customers.
From 1 November account holders will receive just 1.5% interest, compared with 3% previously, in a cut that is six times the recent 0.25% reduction in Bank of England base rate.
Lloyds, 9% owned by taxpayers and the largest savings institution in the UK, also warned customers they faced reductions in savings rates - but did not disclose how deep the cuts would be nor give any assurance that they would be limited to Threadneedle Street’s quarter-point reduction.
Santander said it was forced to make the reduction “due to the market expectation of interest rates staying lower for longer, compounded by increased costs brought about by changes in the banking industry”.
Until now, the account has paid 3% interest on balances of up to £20,000, making it one of the best deals on the high street. Its cashback offer on household bills will remain the same.
But the reduction in returns for savers is huge. Under the old terms, someone with the full £20,000 saved would have earned £600 a year in interest, but this falls to £300 under the new rate – with a further £5 a month account fee also deducted.
It is the second major blow to 123 account holders, who were told last January the account fee was rising from £2 to £5 a month.
MoneySavingExpert’s Martin Lewis said the move was “depressing news for savers”, with most experts predicting a cut to 2% rather than 1.5%. “The bank account that has topped savings tables for over four years will take a hammer to the interest it pays from 1 November. It’s a huge blow to many people’s savings income. Santander 123 has been the one refuge for those with a decent amount of cash.”
Lewis added that while many account holders “will be furious and want to ditch it to punish Santander”, it may make sense for some to hold on, despite the cut.
Andrew Hagger of MoneyComms.co.uk said the only surprise is that this move didn’t happen at least 12 months ago. “There will undoubtedly be plenty of anger and frustration from customers who now will be faced with scratching around for a 1% return, if they’re lucky, from an instant access savings account, or 1.5% for a one-year bond with no access to their balance.”
For customers of Lloyds, which also owns Halifax, there was little indication of the scale of the saving cuts that are being planned. The bank, known for its black horse logo, indicated a decision would not be made until 1 October - the date when holders of its standard variable rate mortgages would receive the full quarter-point cut.
These one million customers – about a third of its mortgage holders – had been waiting to find out how Lloyds would react for 10 days since Mark Carney told lenders they had no excuses not to pass on the reduction. Becoming the last major lender to announce how it would respond to the Bank of England governor, Lloyds said the SVR would fall to 3.74%.
The announcement was less specific for savers, who receive rates varying from 4% for Club Lloyds customers and 0.3% for Halifax Everyday Saver accounts. “We can confirm that over the coming weeks we will make reductions to our savings rates across Lloyds Bank, Halifax and Bank of Scotland,” Lloyds said.
“We will not make any changes to our savings rates for existing customers until we have reduced our mortgage reversionary rates (Halifax Homeowner Variable Rate, Halifax Standard Variable Rate and Lloyds Bank Homeowner Variable Rate) with effect from 1 October 2016,” Lloyds added.
