As the Bank of Canada’s interest rates hikes ratchet up the pain on borrowers, traditional wisdom says better savings rates might follow.
But experts say it’s not a sure thing that savings will grow in a higher rate environment, and consumers ought to be nimble if they want to take advantage of competition in banking.
The Bank of Canada’s target for the overnight rate has risen 4.75 percentage points since March 2022 in an effort to raise the cost of borrowing and take the steam out of rampant inflation.
Shannon Terrell, lead writer and spokesperson at NerdWallet Canada, says that when the central bank policy rate rises, “we tend to see higher interest rates on savings products like guaranteed investment certificates (GICs) and high-interest savings accounts (HISAs).”
“But I will say that the relationship between higher borrowing costs and increased savings rates isn’t always linear,” she tells Global News.
While banks are quick to pass on hikes in interest rates to their borrowers, Terrell says financial institutions can be “a little bit slower” to offer higher savings rates.
Banks aren’t obligated to raise their rates on HISAs when the central bank rate increases, she notes, but might do so to attract more depositors if they’re in need of additional funds to invest.
At that point, it’s a matter of competition dynamics: other banks will be pressured to raise their HISA rates if one player is raising their own to lure more customers.
Global News reached out to Canada’s Big Six banks — TD Bank, RBC, Scotiabank, BMO, CIBC and National Bank — to ask them about how their savings rates have changed over the course of Bank of Canada’s tightening cycle.
CIBC saw its rates increase on all savings accounts after the latest Bank of Canada rate hike in July, a spokesperson confirmed to Global News.
Tom Wallis told Global News in an email that savings account interest rates are updated regularly at CIBC based on market conditions, and that clients are gravitating towards higher rates on products such as GICs.
“As interest rates have increased, many guaranteed investment options have seen notable increases in the rates available to clients, and we’re seeing more clients take advantage of these options to grow their savings,” he said.
A National Bank spokesperson also confirmed that rates on the lender’s HISA have increased over the past year. Among the factors affecting the bank’s savings rates is the “stickiness” of funds, the spokesperson added, meaning the expected movements of the amounts deposited in any particular account.
Get weekly money news
Spokespeople for TD Bank, Scotiabank and BMO all highlighted their “competitive” offerings and said the banks each tailor their savings products to clients’ individual needs and savings goals. An RBC spokesperson said their rates on deposits are influenced by the “competitive environment” and other risk factors.
Promotional offers for competitive rates
Terrell notes that competition in Canada’s financial sector is heavily concentrated among the biggest six Canadian banks. She argues that consumers tend to remain loyal to one financial institution even if other players are offering marginally better rates.
Sandi Martin, an advice-only financial planner, agrees with Terrell.
She says that Canada’s big six banks often won’t have the highest rates in the market because of how “sticky” their clients tend to be.
“The banks, unless it’s promotional for a period of time, generally speaking, are not going to be the best place to pay the highest interest rates on anything, in part because they don’t have to,” she says.
It’s for this reason Canadians might be more likely to see advertising pushes from smaller financial institutions hoping to take market share away from the Big Six with eye-popping rates.
Online banks, credit unions and other challenger institutions can often offer promotional rates of one to two percentage points more on their HISA products, Martin says.
“There’s almost no excuse to stay with one of your (Big Six) bank accounts that’s going to pay you two per cent less,” she says.
Terrell agrees that switching is often in a customer’s best interest — though that comes with caveats.
For one, she says it’s wise to check whether the rate on offer is the established rate on the account or if it’s a time-limited promotion that will drop after a few months.
Ensure that whichever bank or credit union you’re transferring your money into has the same protections as a more established financial institution, Terrell adds. Most Canadians might be “pleasantly surprised” to know that many financial institutions — even the smaller ones — carry the same guarantees of up to $100,000 in coverage under the Canada Deposit Insurance Corporation, she says.
Transferring money from one financial institution to another can also come with fees or penalties to keep track of, Terrell warns. On the upside, she says that many of the smaller banks are offering to cover those transfer fees to make the process of switching over that much smoother.
“Don’t be afraid to jump ship. You have everything to gain by pursuing the financial products and the accounts that are going to be the best fit for your financial goals and your lifestyle,” Terrell says.
Martin says that consumers can absolutely make money by jumping from HISA to HISA across institutions, chasing promotional rates and maximizing their savings.
But she also says that strategy can be time-consuming and laborious, and isn’t necessarily a “homerun” for anyone trying to secure their financial future.
“I think the difference we’re talking about is not a huge order of magnitude between one kind of investor and another,” she says.
“But again, I’m not going to discourage people. If you have the time, if you’re organized enough, if you can make those deadlines to switch things around, be my guest. You actually are going to make more money.”
Should you pile into attractive GICs?
Alongside HISAs, GICs tend to see better savings rates on offer as the central bank rate rises.
GICs typically see an investor commit their money over a period of anywhere between six months to five years or more for a guaranteed return over that time. The catch is that your money typically can’t be taken out of the GIC before the term expires; some products will allow for more liquid GICs, at the cost of a lower rate of return.
While Martin says conservative investors can typically see better rates on GICs during periods of higher interest rates, she cautions that it’s not usually a sound long-term strategy to shift an entire investment approach to whatever the current environment may be.
“You can’t be the kind of person that decides to invest in GICs because you saw a shiny new interest rate,” she says.
GICs are good options for investors who have a shorter-term or set investing horizon where they need to achieve a certain return, Martin explains, and can be an important part of an overall investing portfolio for those reasons.
But GICs, even at today’s higher rates, are not necessarily the ideal place to park money over the next five years, she argues, adding they’re also among the least liquid savings options, especially compared to HISAs.
Other higher-risk options in the stock market could see rates outperform GIC returns, especially over the longer term, Martin says.
“What else could that money be doing over five years?” she asks. “Is it worth the guaranteed five per cent return or is it worth the risk of what else you can do in that timeframe?”
Comments