As anyone with a mortgage can attest, the cost to borrow money has gotten a lot more expensive this year. Banks were swift to pass on the rate hikes the Bank of Canada implemented as part of its aggressive campaign to tame inflation.
Variable rate home loans routinely top five per cent right now, more than twice what they were a year ago.
But the same can’t be said of savings accounts, which are not paying out much more today than they were a year ago, when the Bank of Canada’s lending rate was 0.25 per cent — its lowest level on record.
Canada’s five biggest banks offer a basic savings account with a rate paying between 0.01 and 0.035 per cent at the moment. So, if you are saving $1,000 for a year, you could earn a grand total of 10 to 35 cents in interest.
Even their so-called high-interest savings accounts that come with minimum balances and other stipulations all pay less than two per cent on an annualized basis.
CBC News reached out to Royal Bank, TD Bank, CIBC, Scotiabank and the Bank of Montreal this week, asking for an explanation as to why savings account rates seem to be slow to rise while lending rates do not, and all the responses were versions of a similar theme: that their rates are based on a variety of funding costs, and while rates on savings accounts are competitive, customers can often get higher rates with products such as GICs that lock in their money for a longer term.
Natasha Macmillan, director of everyday banking with rate comparison website Ratehub.ca, says consumers are keenly aware of that gap between what’s happening to the rates on what they owe versus what they have to save.
“As soon as the Bank of Canada raises their interest rate, we see that being translated immediately on the borrowing side,” she told CBC News in an interview. “But it does take a little bit slower for it to be translated to the high-interest saving side — not quite as quickly [and] not quite at the same rate.”
It didn’t used to be that way. While there’s almost always a gap between what banks charge to borrow money versus what they offer to savers, the spread is more in favour of the banks today than it’s ever been.
In 1981, when Canada’s inflation rate peaked at more than 12 per cent, savings accounts were paying out 19 per cent interest. As recently as 1990, inflation was roughly five per cent, and savings accounts were paying out almost twice that.
WATCH | What a rate hike in 1979 meant for Canadian savers:
That’s not happening today, and there are a few reasons why, says Claire Celerier, a professor of finance at the Rotman School of Business at the University of Toronto.
The first one is that the banks have a lot of deposits on their balance sheet; in their quarterly earnings being released this week, the big banks reveal that they have hundreds of billions of dollars of consumer deposits on their books.
While banks are subject to higher borrowing costs themselves, customer deposits make up about two-thirds of their funding source. Right now, with plenty of deposits to satisfy their needs, they have very little incentive to try to convince people to give them more.
“They have deposits, so they are not stressed about having access to more funds,” said Celerier. “And the mortgage market is slowing down so they don’t need more funds to fund more mortgages.”
But the biggest reason why savings account rates aren’t going up as fast or as high as many savers would like boils down to consumer complacency — or what economists like Celerier call the “stickiness” of the market: a reluctance to leave.
Canada’s five biggest banks control the vast majority of banking services in Canada, and while the stability of Canada’s banking sector is often lauded, at the consumer level a relative lack of competition has its downsides.
Most Canadians prefer to keep their money in a bank they know and trust and that offers them other services, so many don’t bother shopping around for higher interest rates, she says. “That has some costs, directly paid by the consumers, which is that mortgage rates might be higher than in other markets, and the rates on deposit accounts might be relatively lower.”
Lack of choices
CBC News witnessed that consumer apathy the streets of Toronto this week, asking Canadians for their take on their humble savings accounts.
“I haven’t really ever thought about it, I’ve just assumed that’s the way that it is,” Kumbo Mwanangonze said of the meagre rate he gets on his savings account. “I’ve never really looked at my savings account as a way to generate additional money.
“I don’t think that it’s fair if you stop to think about it, but the reality is that I don’t stop to think about it — the amount of interest that you could possibly generate from a savings account, I just don’t think it’s enough to even worry about.”
While he didn’t think it seemed fair for banks to keep savings account rates low even as they raise borrowing rates, Josh Chan says consumers like him deserve some of the blame for being complacent, but ultimately “there’s not enough competition for just savings in general. I think it’s not a monopoly but there’s definitely … just not enough choices.”
Jennie Darnley used to work at one of the big banks, a job that she says gave her a front row seat at how good they are at making it hard for customers to switch. “They make it really challenging, which it’s kind of crazy,” she said. “You’re supposed to invest your most precious assets in these banks and trust them, but I don’t really know if they have people’s best interests in mind.”
It may be inconvenient, but MacMillan with Ratehub.ca says it pays to shop around. She says there are high interest savings accounts at credit unions and online-only banks paying out two, three and even four per cent with few strings attached, in some cases, but you have to be willing to hunt for them.
“We definitely recommend people shop around and switch over to … new accounts as they find better rates,” she said. “Some of the [smaller] banks or the credit unions that can offer those better rates than we’re seeing at the big banks.”
Ultimately, Celerier says the onus is on consumers to seek out better deals where they can, because the status quo is just fine for the banks. “Banks are making profits by not passing on the higher interest rates,” she said.
“When the level of interest rates at a savings account is lower than inflation, people are losing money and savings are basically melting away,” she said. “Real returns on savings are negative.”
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