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Say goodbye to high interest rates on savings accounts as lenders cut rates

Money123: A lesson in student banking
With back to school in full swing, and so much to buy and save for, online reporter Erica Alini gives Canadian students a lesson in banking.

An interest rate of 3.3 per cent may not seem like much to Canadians who remember the era when rates reached into the double digits. But when Laurentian Bank’s high-interest savings account (HISA) started paying 3.3 per cent in November after years of below-inflation returns on bank deposits, many took notice.

And as of early February, Canadians looking for a savings account paying more than two per cent had a number of additional options. Motive Financial, the digital subsidiary of Canadian Western Bank, for example, was offering 2.8 per cent. EQ Bank was paying 2.45 per cent. And Wealthsimple, a robo advisor, had recently announced its new Wealthsimple Cash account with an annual rate of 2.4 per cent.

READ MORE: Meet the hybrid spending-savings accounts with interest rates as high as 2.45%

The era of higher-paying savings accounts, however, proved surprisingly short.

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With the general level of interest rates heading toward new lows amid the COVID-19 market turmoil, lenders have been quick to backpedal on their eye-popping savings account offerings.

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Laurentian’s LBD Digital HISA now pays 2.8 per cent. Motive’s Savvy Savings rate stands at 2.2 per cent. EQ has slashed its rate down to two per cent. And Wealthsimple is now paying 1.9 per cent.

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Canadians can still find rates above 2.8 per cent, but those are generally teaser rates that will only last for a limited time period, according to financial products comparisons site Ratehub.ca. DUCA Credit Union, for example, is still offering a promotional three per cent until June 30, but will only pay 1.25 per cent after that.

And some banks that didn’t have the most competitive rates to begin with lowered their base rate even further. Scotiabank’s Tangerine digital baking brand, for example, cut its rate from 1.1 per cent to 0.7 per cent, even though it retained its promotion of 2.75 per cent for 153 days for new clients.

The shift downward doesn’t seem to have been as quick for guaranteed investment certificates (GICs), which, as the name suggests, guarantee investors their money back. Oaken Financial, for example, is still offering 2.55 per cent for investors willing to deposit their money into a non-registered GIC for one year. It is also holding on to its 2.9 per cent five-year GIC.

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However, Canadians can expect lower rates will be eventually passed on to GICs and other fixed-income investments, James Laird, co-founder of Ratehub.ca and president of CanWise Financial mortgage brokerage, said via email.

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“Retirees who rely on fixed-income investments should expect their monthly cash flow to decrease,” he added.

Still, while the lower rates may disappoint some savers, it’s important not to take on undue investment risk for the sake of chasing a few more dollars, said Owen Winkelmolen, a fee-for-service financial planner and founder of PlanEasy.

“I often hear from clients, ‘Should I invest my emergency fund or my downpayment?'” he said.

His answer is no. While the stock market these days is hardly appealing to investors seeking steady returns, even bond funds are riskier than savings accounts and GICs, Winkelmolen said.

For someone with $50,000 sitting in a savings account, an interest rate cut of half a percentage point amounts to just $250 less in returns per year. That’s not worth incurring additional risk, according to Winkelmolen.

At the same time, even as stocks drop, it’s important not to tilt excessively toward safe investments. A portfolio that doesn’t stay ahead of the inflation rate is also a risk, Winkelmolen said.

“You often see pre-retirees or early retirees with a few hundred thousand [dollars] in cash, and that, unfortunately, is not really working for them.”

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There isn’t much savers can do about lower interest rates, but it may be a good time to take a closer look at your banking and investment fees, he said.

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Take a look at what it is you’re paying vs. the value that you’re receiving.”