A higher interest in savings

High interest rates mean higher payout on low-risk interest-bearing investments, but mind there are drawbacks


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If there’s a silver lining to higher interest rates, it’s that saving money has never looked so good — at least in the last 15 years.

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If there’s a silver lining to higher interest rates, it’s that saving money has never looked so good — at least in the last 15 years.

Rates on high-interest savings accounts and guaranteed investment certificates (GICs) are more than double what they were a year ago.

“I don’t remember interest rates being this high on savings accounts and GICs, and that’s a good thing if you need to park cash and want (the principal) to be secure,” says money expert Jessica Moorhouse, a millennial, and Ontario-based financial educator and accredited financial counselor.

Joslyn Pickens / Pexels

Interest rates on savings accounts such as GICs might be peaking.

“I’ve been having a lot of conversations with people about … ‘Oh interest rates are up and I should take advantage.’”

Indeed, interest rates on GICs — about five per cent — and high-interest savings accounts — about three per cent — could be peaking, given they’re generally based on the Bank of Canada’s overnight interest rates.

And many experts believe our central bank has largely stopped hiking interest rates for the foreseeable future.

In fact, given short-term GICs pay slightly more than five-year GICs, lenders expect the central bank will lower interest rates in the next few years due to an economic slowdown.

“Financial institutions are less likely to guarantee a certain rate when they’re uncertain where rates will be in five years,” adds Natasha Macmillan, director of everyday banking at Ratehub.ca.

She points to one of the most generous GIC issuers Saven Financial — an Ontario-based credit union — offering 5.15 per cent on a one-year GIC versus 4.8 per cent on a five-year GIC.

By the way, if you’re looking for the best rates, Ratehub.ca recently released its annual awards for the top GICs, high-interest savings accounts, robo-advisers, etc.

“The newcomer, challenger banks — outside of the Big Five — typically offer the best rates,” Macmillan notes.

These are digital banks like EQ Bank, which offers a one-year GIC in Manitoba at 4.75 per cent versus TD Bank at 4.45 per cent — the best among the Big Five.

“The biggest piece of advice is to not be afraid to shop around,” she says.

The fact is most consumers stick with the Big Five (RBC, TD and BMO, for example), she adds.

But many small financial institutions currently offer interest rates that are half a percentage point higher than mainstream financial institutions.

For individuals with large sums to save, “30 basis points can make a bigger difference in the long term,” she adds.

Yet most Canadians are not apt to move their money around for the best interest rate — at least not until recently, according to a recent JD Power study.

“For much of the last year, there had really been no change in the percentage of consumers who say they’re moving money to another financial institution,” says Paul McAdam, senior director of banking and payments intelligence at JD Power in Illinois.

But March saw a “big uptick” in consumers moving money, he adds.

Well, sort of. The survey found that, after finding 30 to 35 per cent of consumers moved from one provider of GICs or high-interest savings accounts to another for much of the last year, this metric jumped to 37 per cent of consumers in March.

McAdam adds the rise may stem at least in part from other survey findings regarding consumers’ financial fitness.

“Overall, most people wish they had a larger savings cushion,” he cites as one driver for growth.

Although the JD Power study found 90 per cent had emergency savings, the bar was low — $500.

But when it came to the number of months saved for an emergency — like job loss — the survey found a deeper disparity among consumers’ financial fitness.

Notably, financially healthy consumers — about a third of all respondents — had about eight months’ savings versus the financially vulnerable — about 40 per cent of respondents — who had about three months of savings.

The remainder was split almost equally between the ‘financially over-extended,’ who tend to be “younger and more diverse” with 6.5 months of savings, and the ‘financially stressed,’ often generation X and older millennials raising children, who had about three months of savings, McAdam explains.

What’s more, the findings are less positive than during the pandemic when government stimulus was plentiful, he says.

Nevertheless, conditions are ripe for risk-averse investors seeking a little more return than they’re used to getting over the past decade, Moorhouse says.

“If you’re close to retirement or retired, this could be the best opportunity to save.”

Of course, today’s interest-bearing investments have their warts.

Notably, with inflation running high, a three per cent return on a high-interest savings account and even a GIC with a four per cent interest rate can have real returns that are negative — especially after taxes, Moorhouse says.

“So, if you’re really seeking to save money for the long-term and want the best risk-adjusted return for your dollars, you’re still likely better off investing in the stock market.”

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