High-interest bank accounts pay a higher rate of interest on in-credit balances than other current accounts. High-interest accounts are akin to the bank accounts of yore – when you could deposit your capital with a bank and receive a sensible rate of interest for doing so.
Although these accounts seemingly hark back to a bygone age, modern banking is not quite so simple. Most high-interest accounts have stringent ongoing eligibility criteria; there is usually some kind of cap on the balance you can earn interest on; and there could be a monthly fee. On the plus side, you can earn a decent amount of interest and some accounts offer a range of additional ongoing benefits and rewards.
If you have, or are likely to have, an in-credit balance for a prolonged period of time, it’s worth looking into high-interest accounts. But do your homework first so that you can choose a high-interest account that best suits your financial situation.
Getting the best high-interest account
There are many benefits to be had from high-interest current accounts, even beyond those available from high-rate savings accounts, since you can continue to access your money freely. Nevertheless, to get a high-interest account that will work as hard as possible for you, there are a number of things you’ll need to consider.
Sometimes the highest rate of interest isn’t paid on the entirety of your bank balance. Instead, there can be an upper (or lower) limit, with no interest being paid on anything outside of the defined range. If you are likely to have savings above or below these limits, it may be worth looking for an alternative or supplementary account which offers interest on all (or at least the majority) of your balance.
In looking for other accounts, you should focus on getting the highest possible return. It may be that a higher interest rate on a smaller proportion of your balance delivers a better return than a lower interest rate on its entirety – so have your calculator handy.
With some accounts the high interest rate only applies for a limited period of time – usually one year. If you opt for an account with an introductory rate, you should be ready to switch accounts again after that period elapses.
Minimum number of direct debits
Some high-interest accounts state that in order to qualify for the highest rate of interest, you must have a minimum number of direct debits set up with the account. The thinking behind this stipulation is pretty straightforward: banks offer higher interest rates to attract and retain customers. They obviously don’t make any money by offering interest which is well in excess of the current Bank of England base rate, so they want to gain access to the areas of personal banking where they can make money – overdrafts, credit cards, and other auxiliary services like insurance. By forcing you to set up some direct debits, the bank is hoping that you’ll make it your primary account.
Most high interest accounts demand that a minimum amount of money is paid into the account every month. It is usually further stipulated that this money cannot simply be transferred from another account with the same provider. The reasoning is similar to that of enforced direct debits: banks want as much of your business as they can get. The simplest way for them to do this is to provide the bank account that your salary gets paid into.
By having a high ‘minimum monthly credit’, banks can ensure your main source of income arrives in their account, before monthly bills, direct debits, standing orders and other spending has taken place.
Some accounts incur a monthly fee, which can be discouraging when you are looking to make rather than spend money. Usually, though, accounts with monthly fees offer other perks such as cashback on household bills, or free insurance. It is worth calculating the increased interest, plus the value of any perks or benefits, then taking off the monthly fee, to ensure that the fee is not a significant barrier.
Even if you have no intention of using an overdraft, it’s a good idea to check the account’s overdraft charges. Some accounts offer a buffer amount, where you can go overdrawn without incurring any charges whatsoever. Once that amount is exceeded, you can be charged a daily rate, a fixed monthly charge, and/or an EAR (Equivalent Annual interest Rate) which is calculated as a percentage of the amount you are overdrawn.
Some high-interest accounts offer generous cash switching incentives. Most stipulate that you must go through the dedicated switching service in order to be eligible, which can be selected during the application process.
Other benefits of high-interest accounts
Although the conditions associated with running a high-interest account might seem onerous, in practical terms they are pretty straightforward and you will probably qualify without issue. Because of this, there is real competition amongst banks for your business, and most accounts also offer other benefits and perks to woo you.
Cashback is usually capped at a total amount that you can earn per year, or is paid at a different percentage depending on the type of spend. There are usually conditions, such as a certain amount of direct debits must be paid from the account, or a minimum amount of spend or transactions must be undertaken with your debit card. Always check to see if these cashback offers are ongoing, or whether they have an end date.
Many high-interest accounts with a monthly fee offer some form of insurance, typically including gadget or mobile insurance and travel insurance.
These can include commission-free non-sterling cash withdrawals, or fee-free transactions when travelling abroad.
Preferential mortgage rates
If you are considering taking out a mortgage, or switching your mortgage provider, this could be a clincher – though always compare mortgage products across the board to ensure you’re getting the best deal.
Linked financial products
Some high-interest savings accounts only become available if you already hold a current account with a particular provider.
Do any other accounts pay higher interest?
Although high-interest current accounts offer generous returns on your money, alternative products can potentially deliver better returns. The caveat is that these other products – such as peer-to-peer lending – aren’t guaranteed; you could lose everything.
Because high-interest bank accounts are offered by traditional banks with banking licences, depositors are protected by the Financial Service Compensation Scheme or FSCS. This government-backed scheme protects your deposits up to £85,000 if your bank fails, so money held in a high-interest current account is 100% secure. Peer-to-peer products on the other hand offer no such guarantees: they might return the generous interest rates they forecast, or they might not. They may return all of your initial deposit, but they might not. You could be left very out of pocket, and because these products fall into a regulatory grey area, there is no simple way to assess them and make informed investment decisions. In many respects, peer-to-peer products are little more than a long-term gamble.
If you are looking for the best rates of interest and want absolute security for your money, high-interest bank accounts are probably the most accessible products available. So, choose well and get your money working for you.
High interest bank account FAQ
Will I receive the advertised interest rate on my entire balance?
Every high-interest account is different, but many stipulate a maximum balance amount that they will pay interest on, and furthermore, many account providers only offer the advertised rate for a specified period (typically one year). It is always advisable to carefully read the terms and conditions of your chosen bank account, and be ready to switch to an account with a better rate once the preferential rate has ended.
Is the interest on my account fixed?
This depends on the terms and conditions of the account. Some offer a fixed rate for a specific period, while others offer an ongoing variable rate, meaning that the bank account provider can change the rate (though they will inform you in writing first). If your rate does go down, you can always switch to another account offering a better rate.
Does a high-interest account offer a better rate than a savings account?
Some high-interest accounts do offer an impressive interest rate, but you should check out whether the rate is only offered for a fixed period.
Will I be charged a fee for a high-interest account?
It depends. Some banks do charge a fee for a high-interest account. If there is a fee, you need to make sure that the interest rate you are being offered on your balance is high enough to mitigate the fee.
Can I get an overdraft with a high-interest account?
Yes, but you will not earn any interest unless your account is in credit. If you use an overdraft regularly, then a current account offering a free overdraft (up to a specified amount) may be more suitable for you.
Is my money safe in a high-interest account?
Deposits/balances up to £85,000 (£170,000 for joint accounts) are covered under the FSCS (Financial Services Compensation Scheme), meaning that if your chosen bank goes into liquidation, you will be reimbursed up to this amount.
Can I have more than one bank account?
Yes, but many high-interest accounts have strict terms and conditions, such as a minimum income requirement, or a minimum amount of direct debits paid out. Make sure you hit these requirements or your high-interest account will likely be worthless.
Can I open a joint high-interest account?
Yes. Almost all high-interest current accounts offer a joint account option, and they are covered by the seven-day switching guarantee, so it couldn’t be easier.