An interest rate cut from the Bank of Canada earlier this month marked the first signal that borrowing costs are heading down, but experts say the rates Canadians can expect on savings accounts are also at risk.
The central bank’s policy rate, which now stands at 4.75 per cent after a quarter-point cut on June 5, broadly helps set the cost of variable rate borrowing in Canada on key products like mortgages and credit cards.
But it can also affect savings rates that lenders are offering. Banks need capital to operate, which they can get from both earning interest on loans and offering competitive savings rates on their accounts. When interest rates are high and loans are less attractive, lenders might opt to raise their savings rates to attract Canadians’ money.
Shannon Terrell, lead writer and spokesperson at NerdWallet Canada, says that while there’s “a fairly linear relationship” between moves in the Bank of Canada policy rate and rates offered on loans, it’s more of a “mixed bag” on savings products.
In the wake of the central bank’s rate cut, Terrell says some interest rates have come down on some savings accounts and guaranteed investment certificates (GICs) at a few of the major banks in Canada.
But with only a single rate cut so far, and uncertainty about the pace the Bank of Canada will proceed with an expected easing cycle, Terrell says she expects many banks to keep their savings rates higher to remain competitive.
Barry Choi, personal finance expert with Money We Have, also said in an email to Global News that some banks may choose to keep their savings offers elevated despite the rate cut.
“That said, it really comes down to each individual bank as some are offering higher rates than others. The ones with better rates could drop things sooner than the rest,” he said.
Competition for savings products like high-interest savings accounts and GICs can be fierce.
Terrell argues that Canadians can often find attractive products by looking outside Canada’s Big Six banks to challenger or digital-only banks. Accounts here can offer more attractive rates because she notes they don’t have the overhead costs associated with running brick-and-mortar branches, for example.
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That can understandably cause some Canadians discomfort if they’re not able to stroll into a local branch to talk to a representative, Terrell says. But she recommends any Canadians curious about non-traditional banks seek online reviews from the Better Business Bureau and even Reddit to ensure customer service levels are up to snuff before opening an account.
Banks that are certified by the Canadian Deposit Insurance Corp. also come with insurance to cover up to $100,000 in deposits, a standard level of protection across the Canadian banking industry.
“I think in general, we tend to have a lot of bank loyalty in Canada. Sometimes we don’t realize the wealth of choice that we actually have until we start researching,” Terrell says.
NerdWallet Canada earns compensation by featuring products from challenger banks like EQ Bank and Neo as well as from established players like BMO and Scotiabank.
A common tactic for banks looking to earn new business is to offer a time-limited promotion on the account, which offers a high, attractive rate at first that defaults to a lower rate after, say, six months.
While these upfront rates can be quite attractive, Terrell recommends Canadians read and understand the full terms and conditions of the account before moving their money over. That means knowing any fees or minimum account balances needed to earn the higher rate, and what savings rate the account will default to after the promotional period ends.
“You want to read the fine print and make sure you understand what you’re signing up for,” Terrell says.
Choi also notes that some banks are adding new requirements to increase the stickiness of these accounts, requiring in some cases for customers to set up direct deposit or other recurring billing arrangements that ultimately make it harder to switch to accounts at a competing bank.
Terrell says that regularly moving money around to take advantage of different promotional accounts can be a strategy to “chase the deal,” but that it can be “challenging” to keep track of money at multiple institutions. There’s also no guarantee that the next promotional rate will be as attractive as the last, depending on the state of the savings environment when the current offer ends.
“Sometimes it’s better to ride it out a little, wait and make sure you know what you’re doing with your money before you move it,” she says.
“Promotional periods and promotional interest rates can be a great way to add more value to your savings. You just want to make sure that it’s a potentially good account for you in the long term.”
One of Canada’s digital banks, EQ Bank, recently launched a new product offering relatively high savings rates – with a catch.
The notice savings account from EQ Bank requires customers to give 10 days’ notice for any withdrawals or moves in return for 4.5 per cent interest, or the option of 30 days warning in exchange for five per cent interest. It otherwise comes with no fees or minimum deposit levels, and these rates don’t expire after a set time.
While the notice savings account is a concept available in other banking jurisdictions around the world, EQ Bank claims to be the first institution to offer such an account in Canada.
Mahima Poddar, senior vice-president and group head of personal banking at EQ Bank, tells Global News that the new notice savings account is a good vehicle for Canadians who are saving for medium-to-longer-term savings goals.
The idea came from speaking to Canadians who had specific goals like travel, where they had a set date when they knew they’d need the money they’re saving up, she says. But it’s also right for saving towards a downpayment on a home or vehicle, Poddar says – medium-to-longer-term goals where a customer can plan their withdrawals further out in advance.
From EQ Bank’s perspective, Poddar says having the guarantee that a customer’s money will remain in the account for 10 or 30 days at a time gives the stability the bank needs to be able to offer relatively high interest rates. The rate on the notice savings account is not time-limited or promotional, but is subject to change like other high-interest savings accounts in Canada.
Terrell says the notice savings account indeed comes with an attractive rate. But she warns Canadians who are looking solely at the number to consider the eventual needs for their money before piling it into the account.
The notice period for withdrawals limits the notice savings account’s use as an emergency fund, for example. Money needs to be “highly liquid” in the case of an emergency, not waiting for a withdrawal period to end before it can be put to use, she says.
“Especially for a financial emergency. We want to be able to access that money quickly,” she says.
Choi agrees that a notice savings account is likely not appropriate for short-term cash needs and emergency funds.
Poddar also acknowledges that the notice savings account is likely not right for Canadians who want to build up cash reserves for short-term uses. But for those who are looking for a solid return over even a few months’ time and can afford a bit of foresight in their financial planning, she believes the notice savings account is a solid choice.
“The extra rate that you’re getting, plus no fees, ends up being much more attractive than the couple of days of planning that may be required,” she argues.
“The lower the fees, the higher the interest, the faster that you’re going to be able to get to those savings goals.”
