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Why aren’t savings interest rates increasing with borrowing rates?

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If you’ve applied for a mortgage or loan in the past year, you might have noticed something: debt interest rates keep getting higher, but savings account interest rates in Canada — at least those from the big banks — are staying low.

The higher interest rates on borrowing products are thanks to the Bank of Canada (BoC)’s recent rate-hiking campaign. In an effort to curb inflation, which soared to 8.10% last year, the BoC has raised interest rates eight times in the last year — from 0.25% in January 2022 to 4.5% in January 2023. As a result, consumers are seeing higher interest rates on things like variable-rate mortgages, personal and auto loans, and home equity lines of credit.

While most types of credit products have been impacted, the interest rates on other financial products have barely budged. So, what’s the deal? Why are interest rates so low in Canada when it comes to savings accounts?

It all comes down to risk, says Jason Heath, an advice-only financial planner at Objective Financial Partners in Markham, Ont. “Banks tend to use deposits from savers to lend to borrowers for mortgages and earn a profit on the spread,” he says. “Mortgage lending has slowed down, so banks are not vying as much for saver’s savings.”

Why most savings account interest rates in Canada haven’t increased

Put more plainly: the big banks won’t add the additional risk of paying their customers a higher interest rate if they don’t have to, especially when there is uncertainty about whether the BoC will raise or lower rates in the future. “There is less of a rush to raise rates that might drop before long, anyway,” says Heath.

There’s been a lot of chatter around when the BoC may look to cut rates, particularly as Canada enters a mild recession. Many experts are predicting the central bank could cut rates as soon as the end of 2023. For now, as long as customers are happy doing all their banking with the Big Five, there’s little incentive to raise rates on savings accounts.

Scotiabank is offering 1.5%* interest on its savings accounts, CIBC is offering 1.4%*, and TD and RBC are in the same range at 1.6%* and 1.5%*, respectively. If you’re lucky, you may find a promotion to earn a higher interest rate for a shorter period (like this one from Scotiabank, which allows you to earn 5%* for five months). That said, those promotions usually require you to open a new account or add other products to your portfolio.

Canadians have choices outside of the Big Five banks

Fortunately, consumers in Canada can get better savings account interest rates beyond the five major financial institutions. In fact, there is a healthy and growing selection of online banks in Canada that often offer competitive savings rates.

“Savers should shop around,” says Heath. “It can be worth it to look beyond traditional banks to online banks, credit unions, and trust companies.”

For example, EQ Bank, the online banking arm of the 70-year-old Equitable Bank, offers 2.5%* interest on all deposits with no expiration date on the rate and no transaction fees. Other online banks and organizations like Alterna Bank (2.5%* interest) and Wealthsimple Cash (3%* interest with direct deposit) have joined suit, hoping to lure customers away from traditional banks with higher interest rates.

How to maximize the interest rate on your savings

While sticking with one primary bank for all your credit, daily banking, and savings needs might’ve worked well when interest rates were low, Canadians are being hit by both high inflation and high interest rates right now. To get ahead, it’s essential to maximize the interest earned on your savings. Here are three financial products that can help:

  • High-interest savings accounts: For money you want to access easily, high-interest savings accounts from online banks like EQ bank can be an ideal place to stash cash that is still accessible and not subject to fees.
  • Guaranteed investment certificates (GICs): For cash that you don’t need right away but don’t want to risk in the stock market, GICs offer a guaranteed higher rate of return than savings accounts, though your money is locked in for periods ranging from one month to five years. Current GIC rates are sitting at 5.05%* and 4.75%* for one-year GICs at Oaken Financial and EQ Bank, respectively.
  • Low-risk investments: For capital you won’t need for more than five years, consider investing with a robo-advisor like Wealthsimple or an online brokerage like Questrade.

If you’re worried about the safety of parking your cash with a new provider, Heath recommends checking whether your institution is insured by the Canadian Deposit Insurance Corporation (CDIC), or provincially insured by an organization like the Deposit Insurance Reserve Fund (DIRF).

CDIC insurance automatically covers up to $100,000 worth of deposits in the event your bank or financial institution goes bankrupt. “Online banks are generally CDIC insured, so [they] have the same coverage as the Big Five banks,” says Heath. “Credit unions may have even higher insurance coverage.” In Ontario, for instance, credit unions have up to $250,000 worth of deposit coverage via the DIRF, while some provinces provide unlimited coverage for credit union deposits.

A recent WealthRocket survey revealed that, given the recent bank crises in the U.S. and Europe, 15% of Canadians have transferred their money to a different institution and 13% have checked to see if their bank is a CDIC member.

Whether you’re feeling the pinch with interest rates or inflation (or both), beware that this financial climate will likely stick around for a while yet. So, if you’re looking for ways to get ahead financially, don’t shy away from online banks that can offer higher savings rates. 

*All rates as of March 27, 2023

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