Gains are slowly coming back for savers
Rising interest rates Interest does not apply to all savings products and does not fully compensate for inflation.
If the successive increases in the Bank of Canada's key rate are hurting indebted households, they are benefiting savers. After years of abysmal interest rates, banks are raising interest rates on some savings products, which still remain well below the rate of inflation.
This is the first time that we have seen significant increases in interest rates and quickly, underlines Bruno Mercier, investment advisor at National Bank Financial.
In his financial institution, interest rates on high-yield savings accounts have risen from 0.25% interest rate at the start of the year to 2.4%. Rates on guaranteed investment certificates (GICs) that lock in money for a fixed period have also doubled in six months.
It's been 10 years since I've seen 4.6% for a GIC, notes Bruno Mercier.
GICs have been neglected for years, but they are reviving with a new popularity. In its third quarter results at the end of August, Royal Bank of Canada noted an influx of customers seeking high-yield deposit products.
Canada Savings Bonds also offer sharply higher interest rates than the past decade.
As rates are tied to increases decided by the Bank of Canada and the latter has indicated its intention to continue raising the key rate, savers can expect higher interest rates in the future, says Sébastien McMahon, chief strategist at iA financial group.
Fabien Major, financial planner at Assante Capital Management, however, puts hopes of big profits in perspective. He points out that rates, even when raised, remain below inflation and that interest may be subject to tax.
Our purchasing power has eroded approximately 7% in the past year. If I have a security deposit certificate that earns me 4% and is taxable at 50%, I already only have 2% interest left. Then I apply inflation and I'm in deficit by 5%, he explains.
Despite market volatility and worries about a possible recession, equities generally earn more if the investment is long-term. Historically, the Stock Exchange offers 9% return per year, says Fabien Major.
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Even though financial institutions follow Bank of Canada hikes, increases for savings are much slower and weaker than those for borrowing, also notes Natasha MacMillan, Director of Daily Banking at ratehub.
During the pandemic, Canadians have saved a lot and put their money in the bank. So banks don't need to raise [interest rates] since they already have money at their disposal, says Natasha MacMillan.
She adds, however, that savers begin to look for better rates and to encourage competition, which could also accelerate the rise in interest rates. Some banks are already offering the highest GIC rates in seven years.
Basic bank accounts, however, still have very low rates, under 1%. According to Sébastien McMahon, it is because these accounts are not profitable for the banks.
It is above all a question of competition between the banks. Banks don't really compete on interest rates for savings accounts which are transaction accounts, he explains.
He adds that banks prefer to attract customers to savings products that tie up money for fixed terms.
Of course, the choice of savings product depends on what the money is being saved for and for how long. According to Sébastien McMahon, an old advice from a financial planner becomes relevant again: As we approach retirement, our age should correspond to our share of bonds in our portfolio of savings products.