When interest rates drop, the growth of your savings slows — and it can happen without you even knowing it. Your account’s terms and conditions often allow your bank to change your interest rate without notification. Learning how to predict these changes and find out if they affect your account can help you stay on top of your finances.
Banks are private businesses with the right to set and change interest rates as they please. However, these rate changes don’t come out of nowhere — the interest rate on your savings account usually fluctuates in line with the national prime interest rate.
This rate is set mostly by the Bank of Canada as a target by which banks set rates for both loans and deposits.
The Bank of Canada is Canada’s central bank. It establishes national monetary policy, controls the country’s currency and acts as the government’s financial agent, managing both public debt and foreign exchange reserves. Keeping an eye on the prime rate set by the Bank of Canada can help you predict when your savings account rate might change.
Banks aren’t required by law to base interest rates on the prime interest rate and can choose to set rates higher or lower instead. However, the prime rate indicates the direction that financial policy in Canada is going to take, so financial institutions pay attention to it. Nevertheless, this rate is just one consideration that banks look, at along with market conditions and the cost of borrowing from other financial institutions.
What this means for you
You may think your money is working as hard as possible, growing at the APY you signed on to when opening your account. But chances are good that the interest rate on your savings account has fluctuated without your knowledge.
Banks are given a lot of freedom in how they operate — including the freedom to change your APY without notification. Rather than receiving notifications whenever the interest rate is adjusted, you may notice it down the line on – say, a bank account statement reflecting the adjusted rate.
An interest rate cut of 0.25% or 0.50% may not sound like much. But even a small adjustment can result in a sizable difference to your savings balance.
Let’s say you’ve saved up $15,000 in an account with a 1.95% APY. If your bank drops that rate to 1.55%, you’ll lose $61.05 in yearly interest income that would otherwise go straight in your pocket.
The effect of compound interest can quickly multiply the amount of money you’re effectively missing out on. And with the potential for interest rates to continue dropping, the net effect of a lower interest rate put a dent in your savings goals.
How to stay aware of interest rate changes
Remain vigilant to make sure you’re earning the best possible interest rate on your savings account. Review your account’s terms and conditions to find out if your bank is contractually obligated to notify you of rate changes. If they aren’t, it’s up to you to keep track.
Check your monthly account statements to stay on top of your current interest rate. You’ll also stay aware of your total balance to the interest you’re earning, which will help you know when it’s time to shop around for a stronger rate.
Check out these savings account interest rates
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How to earn the best interest rate on your savings account
Take control of your finances while ensuring that interest rate cuts minimally affect your savings bottom line.
Review your savings account at least each quarter for the details you’ll need to compare other, potentially better options on the market. You’ll find a huge range of savings account products offering strong rates for growth, including high-interest savings accounts and saving bonds.
Consider a Guaranteed Investment Certificate (GIC)
GICs come with a fixed interest rate for the term of the deposit, which is also locked-in. GIC rates are often stronger than those for traditional bank accounts, earning you more on your investment with less risk.
Banks are not legally required to notify you when they decide to change your account’s APY. Pay attention to the rate in your monthly statements, and take your money elsewhere if you think you’re at an unfair rate.
Compare savings accounts and GICs from a range of banks to grow your money — and reach your financial goals — more quickly.
Frequently asked questions
Keep an eye on both the Bank of Canada’s prime interest rate, which is the national interest rate, and overall trends in savings account rates (or “deposit rates”) for an idea of whether rates are rising or declining. If the prime rate raises, then banks can potentially afford to pay you a higher interest rate on your savings account balance. However, this doesn’t necessarily mean that banks will.
Between 1979 and 2019, the average deposit rate in Canada was 5.99%. Since the 2008 recession, deposit rates have largely hovered between 0.5% and 2.0%. This roughly corresponds with Canada’s prime interest rate, which has hovered just under 0.5% and 2.0% over the same period.
This means that Canadian banks have, for the most part, continually kept their savings account interest rates just slightly above the national interest rate.
It depends on your situation. Savings accounts are useful because they allow for access to your money with regular interest accrual. GICs usually come with higher rates in exchange for keeping your money safe for a locked-in term, which can help you save for big purchases or retirement.
Tim Falk is a freelance writer for Finder, writing across a diverse range of topics. Over the course of his 15-year writing career, Tim has reported on everything from travel and personal finance to pets and TV soap operas. When he’s not staring at his computer, you can usually find him exploring the great outdoors.
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