How to Get the Best Interest Rates from your Savings Account
The Bank of Canada decided to leave the interest rate unchanged at 1.75% when it met on October 30, 2019. It is notable that this interest-rate is the highest rate since December 2008, the height of the Global Financial Crisis. Interest rates are powerful monetary policy tools. Accommodative monetary policies are associated with lower interest rates, and monetary tightening is associated with rising interest rates. The rationale behind the Bank of Canada’s actions, or any central bank for that matter, is to stabilize economic activity, move towards full employment, and encourage economic growth.
When interest rates rise, there is a greater incentive to invest money in fixed-interest-bearing accounts. An extreme case highlights this perfectly: if the prevailing interest rate was 25%, people would be more inclined to invest their money in a savings account, compared to a 0% interest rate. When there is too much money in circulation, central banks tend to raise interest rates to remove excess capacity from the economy. Cheap money floods the market when interest rates are low, and money is removed from the system when interest rates are high.
It’s important to shop around for the best savings rate since they vary from one financial institution to another. You should also consider where the money should be held, be it in a tax-advantaged account or a non-registered savings account. The Registered Retirement Savings Plan (RRSP) was invented specifically for retirement savings. The money you put into an RRSP can be saved (cash) or invested and taxes are deferred until retirement. Canada’s government also introduced the Tax Free Savings Account (TFSA) in 2009. As the name suggests, it’s a tax-advantaged account that can be used for any savings goal. A TFSA can hold savings (cash) or investments. The best benefit is that any interest or dividends earned will not be taxed and the money can be withdrawn anytime without a penalty.
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Bank Accounts with High Interest Rates
Banks differ in relation to the level of customer service and financial planning they offer. However, the best savings accounts are typically associated with the highest interest rates. Many people simply accept the interest rate paid on their savings accounts by their bank. There is the sense that our bank accounts are entrenched components of our financial DNA. This mindset perpetuates blind loyalty to banks, despite the fact that they may not be offering you the best interest rates on your money. The FinTech sector has shattered this notion, by providing plenty more options to customers in this regard. In an era where low interest rates are pervasive, it is especially important to do the requisite legwork to find value for money.
High interest savings accounts, HISA certainly exist across Canada, and include the following options:
- BMO Savings Builder with interest rates ranging between 0.2% – 1.6%, with no minimum balance required
- RBC high interest eSavings with 1.00% interest rate and no minimum balance required.
- Scotia Momentum Plus Savings Account with up to 3% interest rate (promotional offer), and no minimum balance required.
- Wealthsimple Save with an interest rate of 2% and no minimum balance required.
The correlation between the official interest rate, determined by central banks, and the interest-rates charged or paid by commercial banks is not absolute. Commercial banks are sometimes slow to react to central bank changes to the benchmark interest rate (Canada), or the Federal Funds Rate (USA). It is incumbent upon bank customers to conduct the necessary research to uncover banks which offer higher interest rates on savings accounts.
Canadian Banks with Competitive Interest Savings Accounts
In an era of low interest rates for borrowing or savings purposes, many customers invariably look toward other factors to determine where they will invest their money. For example, does the bank require a minimum account balance to maintain the savings account? What are the fees, commissions, and hidden charges associated with maintaining a bank account? Is it better to invest at a land-based bank, or an online bank? How effective and responsive is customer support? These factors are equally important, especially when interest rates are so low.
The Scotiabank Momentum Plus Savings Account is an example of a savings account with a competitive interest rate. While the basic interest rate is 1.00%, there are bonuses available to savers. This is known as Premium Period Interest. It is possible to earn an additional 1.00% in interest if the savings remain untouched for a specified period of time. With additional deposit deals of 1.00% through January 30, 2020, savers can effectively earn as much as 3.00% in interest at Scotiabank.
Another notable high interest regular savings account is offered by Tangerine. New clients can apply for a special interest rate of 2.75% valid for the first six months of the account being opened. After the introductory period, the interest rate drops to 1.10%. Given that this is a flexible savings account, the rate is competitive enough to warrant consideration. As with many savings accounts, the longer you leave the money untouched in the account, the higher the interest payments will be. Wealthsimple Save does not have any promotional rate but offers an interest rate of 2% per year regardless of how long you leave your money in their savings account. Bank consumers seeking flexible savings accounts where money can be deposited and withdrawn instantly will likely have to deal with lower overall interest rates.
Bricks and mortar banks are typically associated with much higher fixed costs of operations, including physical premises, tellers, ATM machines, and this may impact the interest rate these banks pay on savings accounts. By contrast, online banks have much lower operations costs and can generally afford to pay higher rates of interest on savings accounts.
Author: Liv Taub
