Better savings rates may follow as the Bank of Canada's interest rate increases increase the pain on borrowers, according to conventional thinking.
However, experts caution that there is no guarantee that savings would increase in a higher rate environment and advise consumers to be adaptable if they wish to benefit from banking competition.
Since March 2022, the Bank of Canada has increased its goal for the overnight rate by 4.75 percentage points in an effort to increase borrowing costs and quell the pace of inflation.
When the central bank policy rate increases, according to Shannon Terrell, head writer and spokeswoman for NerdWallet Canada, "we tend to see higher interest rates on savings products like guaranteed investment certificates (GICs) and high-interest savings accounts (HISAs)."
While financial institutions can be "a little bit slower" to provide higher savings rates, Terrell claims banks are fast to pass on interest rate increases to their customers.
She points out that while banks aren't required to increase their rates on HISAs when the central bank rate does, they might do so to draw in more depositors if they need more money for investments.
At that point, it becomes an issue of competition dynamics: if one player is hiking their HISA rates to entice more consumers, other banks will feel forced to do the same.
Both Scotiabank and BMO's spokespeople emphasised their "competitive" offerings and said that the banks individually customise their savings plans to clients' particular needs and financial objectives.
Promotional Deals at Affordable Prices
According to Terrell, the top six Canadian banks dominate the financial industry's competitiveness in Canada. She contends that despite competitors' slightly superior rates, customers frequently stick with one banking company.
Financial planner Sandi Martin, who only offers recommendations, concurs with Terrell.
She claims that due to how "sticky" their customers are apt to be, Canada's major six banks frequently do not provide the highest rates in the market.
In general, she asserts, "the banks are not going to be the best place to pay the highest interest rates on anything, unless it's promotional for a period of time," in part because they are not required to.
Because of this, Canadians may witness greater marketing efforts from smaller financial institutions attempting to seize market share from the Big Six with exorbitant prices.
According to Martin, online banks, credit unions, and other challenger institutions frequently offer promotional rates for their HISA products that are one to two percentage points higher.
She claims that there is "almost no excuse" for continuing to use one of your Big Six bank accounts that will pay you 2% less.
Terrell concurs that switching is frequently in a customer's best interest, but he adds certain restrictions.
For starters, she advises checking to see if the rate being offered is the one that has been established on the account or if it is a temporary deal that will expire in a few months.
When transferring money, make sure the bank or credit union has the same safeguards as a more reputable financial institution, advises Terrell. The majority of Canadians might be "pleasantly surprised" to learn that many financial institutions, even the smaller ones, hold the same guarantees of up to $100,000 in coverage under the Canada Deposit Insurance Corporation, she says.
Terrell cautions that there may be charges or penalties associated with moving money between financial institutions. On the plus side, she notes that many of the smaller banks are offering to pay those transfer fees to make the transition over that much easier.
"Don't hesitate to leave the boat. Following the financial accounts and items that will best suit your lifestyle and financial objectives would only benefit you, according to Terrell.
According to Martin, clients can definitely profit by switching between HISAs at other banks, pursuing special rates, and maximising their savings.
She adds, however, that this approach can be time-consuming and demanding, and it isn't always a "homerun" for those looking to guarantee their financial future.
Should you invest heavily in tempting GICs?
As the central bank rate rises, GICs and HISAs often offer superior savings rates.
With a GIC, an investor typically commits their funds for a guaranteed return for a period of time ranging from six months to five years or more. The drawback is that most GICs do not allow withdrawals of funds before to the end of the term; however, certain products do, at the expense of a reduced rate of return.
Martin notes that while conservative investors often benefit from higher GIC rates during times of rising interest rates, she advises against changing one's entire investing strategy to suit the current market conditions.
Martin says that GICs are suitable choices for investors that have a shorter-term or predetermined investing horizon where they must attain a specific return and can be a significant component of an overall investment portfolio.
She asserts that GICs are among the least liquid savings options, especially when compared to HISAs, and that they are not necessarily the best location to park money over the next five years, even at today's higher rates.
According to Martin, rates for other, riskier stock market investments may beat GIC returns in the long run.
source: https://globalnews.ca/news/9857597/interest-rates-savings-opportunities-gics/