Nationwide declares price war on big four with 4.25% interest rate

Britain's big four banks are facing a renewed assault on the lucrative current account market after Nationwide building society launched an account paying 4.25% interest.

The rate dwarfs the 0.1% interest that the high street banks pay on basic current accounts, which have remained largely in the hands of the traditional players despite growing competition.

Nationwide said the 4.25% rate, payable from April 1 on its "Flex" current account, would be paid to all customers who paid in at least £1,000 a month. It would only be paid on balances up to £3,000. The building society is also offering an overdraft rate of 7.75%, compared with 14.8% to 18.2% charged by the big four banks. It said the average bank customer could be £130 a year better off by switching accounts.

Over the past year several former building societies-turned-banks have been raising the interest they pay customers to attract new customers. Nationwide estimated that it would cost the big four banks £4bn altogether to match its rate.

The new Nationwide rate enters the "best buy" tables just below Alliance & Leicester, which pays new "premier direct" current account holders 4.89% interest. However, this is an internet-based account and pays the interest only on balances up to £2,500. Abbey is offering new customers a rate of 6%, but only for the first 12 months.

Lloyds TSB is the only one of the big four banks to offer a free account paying anywhere near as much as this. Its Classic Plus account pays 3.93% interest but only if you pay in £1,000 a month and agree to log on to its internet banking service a minimum of three times every three months. NatWest, Barclays and HSBC all pay only 0.1% interest on their basic current accounts.

Until now the big four banks have relied on consumer inertia to retain customers, hoping they would decide that the extra income was not worth the hassle of switching accounts.

Stuart Glendinning, director of current accounts at the price comparison website moneysupermarket.com, said: "There is no question that this is a positive development, and will provide further encouragement for consumers to switch away from the big banks.

"With most bank account holders still only benefiting from 0.1% interest for balances in credit and high overdraft charges, this product comes as a breath of fresh air. The 4.25% rate is market-leading, taking into consideration there is no bonus period, and it is available on a respectable sum - ie, on the first £3,000."

Stuart Bernau, Nationwide's executive director, said: "The current account market is changing and Nationwide is delighted to offer an exceptional rate which is available to both new and existing customers."

Best and worst deals

What the banks pay in interest on current accounts

Alliance & Leicester1.49%-4.89%*

Lloyds TSB0.1%-3.93%*

Nationwide4.25%+

Halifax0.1%-2.5%+

Barclays0.1%

HSBC0.1%

NatWest0.1%

+ Minimum funding of £1,000pm * Minimum funding and requires internet banking

Source: Moneyfacts