When you come across what seems like an amazing deal, it’s a good idea to figure out if there’s a catch. Put another way, is the deal as good as it seems on its face, or are there terms and conditions that make it somewhat less appealing?
Such is the case with promotional offers on high-interest savings accounts and GICs. Chances are you’ve seen an ad for a great interest rate at a financial institution. The rate is almost always better than the regular rate offered by most banks.
These promotional rates are designed to do one thing: entice depositors away from their existing financial institution so that they bank at the one dangling the special rate. It’s a classic example of one company attempting to increase its market share at the expense of its competitors.
As a consumer, should you take the bait?
Answering this question requires first knowing a crucial fact about these promotions. Namely, the seemingly high level of interest is only available for a specified amount of time, usually a few months. Once that term is over, the savings account or GIC reverts back to its normal rate, pre-promotion.
Take PC Financial’s recent offer of 2.5% interest on new deposits in its RRSP and TFSA accounts. This includes new and existing accounts so you either had to open a new account with PC or transfer additional funds into one you already had with the bank. As PC noted in its terms and conditions, the interest was “calculated based on the portion of the eligible account’s average daily closing balance during the offer period that exceeds the closing balance as at December 31, 2015.” Not surprisingly, to maximize the interest you could have received, you would have had to have your funds in the account for the entirety of the promotional period.
After this promotion ended, depositors went back to getting 0.80%—the current rate for PC savings accounts—on their money.
Let’s imagine that you had $10,000 at your current bank in December 2015, and it was earning the same as the normal PC rate (0.80%). Was it worthwhile to switch?
With 366 days in 2016 (a leap year!), you would get three months’ worth of enhanced interest by switching. January had 31 days, February had 29, and March had 31. That’s a total of 91 days earning 2.50%. After that, you would then receive 275 days’ worth of 0.80% interest.
To figure out how much interest you would have earned from January to March, we divide the interest rate by the number of days in a year because the interest rate is expressed as an annual percentage, then multiply this number by $10,000:
(0.0250/366) = 0.00006831 x $10,000 = $0.683
Every day during the offer period, your account would have made $0.683, assuming your balance is $10,000. Thus, you would have earned 91 days of $0.683 interest, or $62.15. How about the rest of 2016?
Let’s assume you keep the promotional interest in the account so the starting balance for the 275 days would be $10,062.15. Using this figure, you make $0.2199 per day for 275 days, or $60.48. You would end up with $10,122.63 by the end of the year.
That’s the initial $10,000, plus $62.15 in the promotional period, plus $60.48 during the remainder of the year.
It’s helpful to look at the year as a whole, because it allows us to calculate an effective annual interest rate. In this case, you would earn 1.226% over the course of 2016.
Going back to our question, was it worth it to move your money over?
Well, it really depends. Admittedly, you would make at least some more money if you do switch. Assuming an interest rate of 0.80% at your existing bank, you would have earned an extra $42.63 by moving your funds over to PC ($122.63-$80.00).
One question to ask yourself is whether it’s worth your time (and time is money) to open a new account and transfer your funds over for this level of increased interest.
More fundamentally, before jumping at a short-term teaser rate like this one, it’s worthwhile looking around to see if there’s a great rate you can take advantage of that won’t expire. The key is to do a comparison between banks over a decent period of time. That way, you’ll get a true sense of which bank offers the most competitive interest over the long haul.
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