Comment: Santander's Up-Front Interest Bond: How 'Revolutionary' Is It?

Revolution is a more powerful term than most people realise. It implies a rising order to be witnessing - and even delighting in - its overthrow of an old and failing order. So, how does that work exactly for a savings account?   Santander's new Upfront Interest Bond has caused some controversy across the web this week, so perhaps it's time to investigate this particular product a little closer.

Described as 'revolutionary', the product is a three year fixed-rate bond that offers 3.36% gross AER. It requires a minimum of £10,000 to open, and the interest must be paid into a linked Santander current account.

The innovative feature is that full compound interest is paid at the beginning of the term. Santander aims to turn the market on its head, and considers this type of arrangement the first of its kind.

Setting the record straight: the figures

A comment left on our site this week after we ran the story (swallowed by the transfer to our new-look site) misinterpreted our figures. Here, to avoid any hints of obfuscation, we lay them out flat. For the minimum opening of £10,000, the bond returns as follows:

• Initial amount: £10,000
• Compound interest calculation: 1.0336³
• Gross return = £11,042.25
• Net interest = £1,042.25 - 20% (£833.80)

It was suggested that we had our sums wrong for Santander's promotional figure of £12,000, but this was not the case. That sum just happens to work conveniently for promotion because it benefits a high-impact campaign to promise £1,000 straight back to the saver.

Clearly, it is successful in blinding eyes to the real facts and figures in front of them.

The new-look Which4U.co.uk

How does this compare?

Reasonably, but not brilliantly, would be the succinct response. It is certainly not the most competitive savings account on the market, as we also made clear at the time.

Clydesdale Bank and Yorkshire Bank both present strong alternatives at 4.3% for a three-year bond. Over the three year period, the interest on that same £10,000 would follow:

• Compound interest calculation: 1.043³
• Gross interest = £11,346.27
• Net interest = £1,346.27 - 20% (£1,077.02)

Hence, a quite noticeable improvement of £243.

This difference could be reconciled in part if the up-front interest from Santander was immediately reinvested. For example, adding the £833.80 to Yorkshire BS's 18-month bond at 3.5% (minimum amount £1,000) would see that proportion generate £44 of additional supplementary interest. In half the maturity period of the Santander bond, the arrears on the competition are reduced to £200 and saver retains an £878 advance.

'Revolutionary'?

But that is hardly the point, nor the attraction, of the product. It is the immediate advance which is likely to capture attention, with the prospect of a £833+ sum available to spend before Christmas.

Savers must weigh up the benefits of an advance with the concession of a lower rate than can be found elsewhere in traditional bonds.

"Do I want less now, or more later?" The thought process behind this particular savings product is hardly revolutionary. But it would be crass to disregard the idea of upfront interest, and we may indeed seek to categorise it differently from other savings products currently available.

In that sense, by forging a place for itself on the market, even without sparkling competitiveness, this has a radical glint to it.

Revolutions are determined more by their conclusions than by their initiations. Whether this will prove a new market phenomenon remains to be seen. What seems fairly certain, though, is that this savings account is creating a lot of chatter. That means the old order is taking notice.

See what Which4U's savings accounts tables can offer. Our best offers today will beat 3.36%.

Keith McDonald
Which4U Editor

[Edit: January 2012 - Santander have announced a new issue of this upfront bond until February 20th. If this is the right product for you, then get applying!]