Bank accounts: Overdraft charges are changing next month – how will it affect you?

Bank overdrafts are an essential element of financial planning for many people. Recent polling data from the research and strategy consultancy Populus highlighted how essential overdrafts are for modern families. According to analysis conducted on their survey from January 2020, over 1.2 million UK borrowers use their overdraft to fund rent or mortgage payments.

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This equates to roughly 13 percent of the overall population.

The percentage could be increased in the coming years if costs continue to rise.

According to a recent report from Hometrack, the average rental price in the UK rose by 2.6 percent annually to £886 per calendar month in quarter four 2019. This is the highest rate in three years.

Recent analysis from the ONS also highlighted the problem, with their “expenditure on mortgages by mortgage holders” data revealing that mortgage payments could nearly be as high as £700 month for some people.

With overdrafts becoming more essential for housing costs many will likely be anxious about any changes made to the rules concerning them.

From April, changes will be introduced that will affect overdrafts across the banking world.

There are different facets to the changes but the Money Advice Service detail that there are three main changes that will affect people the most.

These changes include:

  • Interest on all overdrafts will be charged at a single annual interest rate (APR).
  • No daily or monthly fees for using your overdraft.
  • The same interest rate for arranged and unarranged overdrafts.

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[ANALYSIS]

Many banks have already revealed how this will affect their overdraft rates and on first glance it seems that costs will rise across the board.

Some common bank accounts will/have had their rates nearly doubled as a result of the changes.

Nationwide’s FlexAccount had its overdraft rate raised from 18.9 percent to 39.9 percent.

The HSBC Advance account rate will also rise to 39.9 percent from 17.9 and First Direct had it’s 15.9 percent rate more than doubled. These rises are similar across many large banks such as Santander, Lloyds and Monzo.

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Despite this, some organisations have detailed that consumers will actually be better off under the coming changes.

As Colin Rowe, digital editor at the Money Advice Service, detailed: “While these might seem like large increases in interest rates, the fact you will no longer have to pay daily and monthly fixed fees means this might not necessarily be more expensive if you only occasionally use your overdraft facility.”

Research from the Financial Conduct Authority claims that the majority of people will be better off or see no change in their circumstances.

Christopher Woolard, the Executive Director of Strategy and Competition at the FCA, explained: “Our changes expose the true cost of an overdraft. We have eliminated high prices for unarranged overdrafts. This will result in a fairer distribution of charges, helping vulnerable consumers, who were disproportionately hit by high unarranged overdraft charges, and many people who use their overdraft from time-to-time.

“seven out of 10 overdraft users will be better off or see no change. At two banks that figure is nine out of 10. Consumers can now see how expensive overdrafts really are. Those who are worse off should consider shopping around to find a cheaper deal. Credit and other forms of borrowing can be significantly cheaper for long-term users.”

As these changes are so broad it will likely be hard to analyse how people will be affected on an aggregated scale.

As is often the case, individual research is the best choice for people who are unsure of how they’ll be affected. The Money Advice Service advise that people should take the following steps:

  • Speak to your bank or building society as soon as possible.
  • If you feel vulnerable for any reason, explain your circumstances and your provider is obliged to take this into consideration.
  • If these changes mean I struggle to pay bills or fall into debt, or you are already in debt, you should find help as soon as possible

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