Look outside Canada’s Big Banks box for best savings rates

Look outside Canada’s Big Banks box for best savings rates

If you’re looking for the best savings rates, you need to go outside the big banking mainstream and instead search in the financial world’s nooks and crannies.

Here are three niche strategies to find top rates: get a high interest savings account from specific small financial institutions; buy ETFs that essentially get you a wholesale savings account rate; or go with investment savings accounts available through brokerage accounts.

Those approaches can make a big difference. The best high interest savings accounts at each of the six major banks currently pay annualized interest of 1.25 to 1.60 per cent (not counting temporary promotional rates paid to new accounts).

But if you broaden your hunt, you can find many examples of annualized savings rates above three per cent, and in a few cases, above four per cent. (Rates described in this column are current as of this week.)

We discuss each approach below in turn:

Big rates from small institutions

One way to find a high savings rate is to park your savings in a small financial institution that makes a point of paying top rates, which they typically use to fund specialized lending that earns high rates as well.

Nine small banks and credit unions currently pay between 3.00 and 3.50 per cent in high interest savings accounts in Ontario, according to highinterestsavings.ca.

One thing to realize is these institutions don’t support the full range of day-to-day banking activities that you generally require from the banking system. So with this strategy, it usually makes sense to keep a checking account with a mainstream financial institution for your day-to-day banking transactions. Then you create a link between accounts at the two institutions and move money as required between them via electronic funds transfer (EFT).

“We’re not trying to be all things to all people,” says Mike Henry, an executive with Oaken Financial, which has consistently been among the group of high-paying small financial institutions during the last few years.

Oaken doesn’t even offer a checking account, but currently pays 3.40 per cent in its Oaken Savings account. Saven Financial, a division of FirstOntario Credit Union, currently offers the best small institution savings rate in Ontario at 3.50 per cent. You can find a listing of other top-paying small institution savings accounts at highinterestsavings.ca.

Always be sure to stay within government-backed deposit insurance limits, because these small players don’t have anywhere near the gold-plated solidity of the big banks.

Most financial institutions that aren’t credit unions are covered by the Canada Deposit Insurance Corporation (CDIC), which has a $100,000 coverage limit per deposit account category. Deposits at Saven and FirstOntario Credit Union are covered to a combined limit of $250,000 by deposit insurance that applies to Ontario credit unions.

If you send EFTs between institutions, it generally takes several days to receive the money. If you deposit a cheque, you could be subject to a longer hold period.

These small institutions don’t have extensive branch networks, so banking interactions are mostly over the phone or online. Oaken has a single Ontario branch in downtown Toronto, while Saven has none.

High interest savings in ETF form

Surprisingly, the way to get the highest of the high savings rates is not directly through a savings account but indirectly through an ETF provider. Five of these high interest savings ETFs offer current net yields (after deducting the management expense ratio) of 4.1 to 4.2 per cent.

The major banks play an interesting role in them. In essence these ETF providers aggregate funds to obtain a preferential bulk rate by generally investing in wholesale cash accounts at the six big banks.

That makes these ETFs reasonably low risk even though they’re not covered by government-backed deposit insurance. Still, without that coverage, they don’t offer the same level of bulletproof safety that you can get with regular savings accounts when you stay within deposit insurance limits.

Self-directed investors can buy these ETFs from most online brokers, although they’re blocked from the online brokerage platforms of three major banks: BMO InvestorLine, RBC Direct Investing, and TD Direct Investing.

Obviously, those banks don’t like ETFs competing with their in-house savings accounts. But to be fair, they each offer investment savings accounts which are covered by deposit insurance and which have rates that are almost as good as the ETFs. I describe investment savings account options below.

The five ETFs (with fund codes and recent net yields) are: the Purpose High Interest Savings ETF (PSA, 4.1 per cent); the CI High Interest Savings ETF (CSAV, 4.1 per cent); the Evolve High Interest Savings Account Fund ETF (HISA, 4.2 per cent); the Ninepoint High Interest Savings Fund ETF (NSAV, 4.1 per cent); and the Horizons High Interest Savings ETF (CASH, 4.2 per cent).

The secret of the investment savings account

One of the best savings products with the highest rates is also among the least known.

It’s typically called an investment savings account but also goes by other names. It’s widely available through brokerage accounts, both self-directed and full-service with an adviser, and is covered by CDIC deposit insurance.

Remarkably, the rates paid by the big banks in these accounts through the online brokerage channel far outstrips what they pay for similar high interest savings accounts in the banking system.

Investment savings accounts currently pay annual interest of 3.25 to 3.80 per cent

Some online brokerages offer lots of choice. For example, CIBC Investor’s Edge allows you to choose accounts of this type from six providers. Others may only offer an in-house option from the same organization, although the rate should still be reasonably competitive.

Online information about this product is limited. If you’re seriously considering setting one up, you may need to reach out to your online brokerage contact center to find out what specific accounts they offer, current rates, and the details of how to set it up.

I recently set up one of these accounts within my own online brokerage account. I found that set up procedures were like those for mutual funds (even though this is a deposit account not a mutual fund). A key set up detail is finding and applying the right fund code, which can be harder than it sounds.

Most online brokerages offer self-directed investors just the A-series version of this account, which typically pays about 0.15 percentage points less in annual interest than the F-series. (The F-series version is mostly intended for accounts with advisers who charge a separate fee for advice.)

Here are examples of A-series investment savings accounts with corresponding fund codes and current interest rates. (Do your own due diligence to confirm rates, codes and other details before purchasing.) Bank of Montreal High interest Savings Account (BMT104, 3.65 per cent); CIBC Renaissance High Interest Savings Account (ATL5000, 3.25 per cent); Manulife Investment Savings Account (MIP510, 3.55 per cent); National Bank Investments Altamira Cashperformer Account (NBC100, 3.25 per cent); RBC Investment Savings Account (RBF2020, 3.25 per cent); Scotiabank Investment Savings Account (DYN6000, 3.65 per cent); TD Investment Savings Account (TDB8150, 3.25 per cent).

In addition, Scotia Itrade allows self-directed investors to purchase the F-series version of the Scotiabank Investment Savings Account (DYN6004, 3.80 per cent).

David Aston, a freelance contributing columnist for the Star, is a personal finance and investment journalist. He has a Chartered Financial Analyst designation and is a Chartered Professional Accountant. Reach him via email: davidastonstar@gmail.com

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