Money for nothing: cashback current accounts

Current accounts aren’t very photogenic.

Want to pay less for your household bills? Keen to cut your council tax, gas, electricity, water, broadband, landline and mobile phone costs?

Then discover the joys of a cashback current account.

OK so we’re only talking small amounts, with up to 3% cashback. But I am all in favour of earning money back on things I would spend anyway, as mentioned in my previous “Money for Nothing” post about cashback websites.

I’m also keen to earn as much interest as I can on our savings, which is tricky given most of the derisory interest rates on offer.

So I’m therefore a big fan of the Santander 123 current account, and will remain a fan (even if a slightly grumpy one) after they start charging two and a half times as much for the account from Monday.

I’ve written out lots of facts and figures below, but the basic message is: if you’re prepared to switch your direct debits and would like to earn 3% interest on chunky savings, it’s worth considering.

If you just want cashback, and don’t have any savings or a Santander mortgage, consider the Rewards current account from NatWest or RBS, mentioned at the end.

What does it cost?

To put the charges on the Santander 123 current account in perspective, they’re jumping up from £2 a month to £5 a month, so it will cost £60 a year rather than £24.

What do I get?

The reason I’m prepared to pay for the Santander 123 current account is because it offers cold hard cash back, rather than vague promises about mobile phone insurance and breakdown cover which I may or may not ever use.

Specifically:

– 3% cash back on mobile, home phone, broadband and (if you’re that way inclined) paid for TV packages.

– 2% cash back on gas and electricity bills

– 1% cash back on water, council tax and the first £1,000 of Santander mortgage payments each month

– 3% gross interest a year on the whole balance when you have savings between £3,000 and £20,000. If your balance is lower, you’ll earn less: 1% on the whole balance if you have between £1,000 and £2,000, or 2% on the whole lot once you have £2,000 up to £3,000.

In today’s topsy turvy world, these interest rates on a current account are higher than the interest paid on most savings accounts.

Is it worth it?

My own conclusion is yes – if you’ve got savings as well as bills.

I had a look at my own earnings when deciding whether to continue with the higher fee.

Over the first 12 months for example, I earnt £67.44 from the cashback on bills, which does cover the new fees at £60 a year. Obviously if you have higher household bills, you’ll earn more.

Santander has a cashback calculator on its website if you want to check the figures based on your own bills.

The real bonus is the savings rates of up to 3% a year before tax, once your balance is higher than £3,000. That means if you’ve got £3,000 savings you can earn up to £90 interest a year, while if you can salt away the maximum £20,000, you’ll get up to £600 a year, before the taxman takes his cut.

Yes, you can find current accounts paying higher interest rates of up to 4% or 5% – but only on distinctly smaller balances of £2,000 to £5,000. Savings Champion has a good table of high interest paying current accounts.

Santander’s cashback and interest is also paid every month, so you get some regular income rather than waiting for a lump sum at the end of the year.

Martin Lewis over at moneysavingexpert.com has a fact-filled blog post about whether it’s worth sticking or ditching the account, and how much you need in savings to make it worth while.

How much hassle is it?

Brace yourself for the trials and tribulations of opening a current account, which could involve schlepping to a bank branch with assorted passports, driving licences and utility bills, and enduring an interview where you repeat a bunch of information you’ve already written on a form.

You don’t even have to switch current accounts, but could leave your old faithful current account open, provided you meet the conditions for the Santander 123 version.

In pratice, you need to pay in at least £500 a month, set up at least two direct debits from the account, and fork out £5 a month as an account fee.

The £500 a month doesn’t have to be salary, but could be a standing order from your existing account, which you promptly whisk away for other purposes.

In my case, the £500 paid in each month more than covers the bills paid out by direct debit plus the account fee, so once a month I transfer any money left, cashback and interest back into my original current account to help pay for everything else. Alternatively, you could leave any excess in the account to continue earning interest.

Some couples with big savings balances go the whole hog of opening three accounts, a sole account each and a joint account, to earn 3% interest on £60,000. I think at that point I’d lose the will to live.

Any alternatives?

NatWest and RBS offer a “Reward” cashback current account, where you pay £3 a month and in exchange get 3% cashback on bills paid by direct debit.

The bills are pretty much the same as for Santander 123 account – council tax, gas, electricity, water, home phone, mobile, TV and broadband.

The conditions are simpler. You don’t need to pay in a specific amount each month, a minimum balance or a minimum number of direct debits, but neither do you earn any interest on any savings, or cashback on mortgage payments.

So long as your direct debits come to more than £100 a month, you’ll make a profit after paying the £3 a month fee. With fees at £3 a month rather than a fiver, and the higher 3% flat rate cashback, you’re likely to earn more cashback with the NatWest Reward account than with Santander.

However, if you have a Santander mortgage, or a savings balance, you’re likely to find the Santander 123 account a better deal.

Barclays Blue Rewards offers rewards too, but they are mainly linked to forking out for specific Barclays products like mortgages and insurance.

So as a saver who hasn’t found Barclays products very competitive, I’m sticking with Santander.

Anyone else a fan of cashback current accounts or fed up with ridiculously low savings rates?

Disclaimer: No I wasn’t sponsored to write this post, and no I don’t get any referral fees, I just use a cashback current account myself and think it is A Good Thing.