Skimpy GIC rates? Try an online bank instead

You're a quiet victim of the uproar in financial markets even if you're a conservative type who wouldn't touch the stock market.

As stocks fell in price, so did the already low interest rates paid on bonds and guaranteed investment certificates. Fortunately, you have options if you want to keep money safe and still generate some semblance of a gain.

Look to high-interest savings accounts offered by online banks. They're paying as much as 2 to 2.5 per cent these days, which is puny in historical terms but right on the money when compared against posted five-year GIC rates as low as 1.55 per cent at the big banks.

As Bob Wornell, a Globe reader in Dartmouth, N.S., found out recently, the banks were quick off the mark in dropping GIC rates when stock markets acted up and money surged into havens. "I have been doing some GIC investing lately … and am amazed at how fast and the extent of the drop in GIC rates over the past few weeks," he wrote in an e-mail.

While GIC rates have been falling, the top rate of interest paid on savings accounts actually moved a bit higher recently thanks to a new competitor called Hubert.

Hubert is an online bank launched late last year by Manitoba's Sunova Credit Union. Hubert started off with a rate of 2.25 per cent and then two months ago moved up to 2.5 per cent.

As Mr. Wornell found, this is the precise opposite of what everyone else is doing. Call it the fear factor at work. When stock markets plunge, money flies into bonds and government-issued Treasury bills and drives up prices. It's a peculiarity of bonds that when prices rise, yields fall. With GIC rates taking their cue from bonds, the trend to lower returns on safe investments seems inescapable.

Except at Hubert, where money taken in through savings account deposits is being used to satisfy a strong demand for loans from Sunova customers.

"We have a high loan demand and we need to fund it," Sunova president Edward Bergen said. "Manitoba has been relatively unaffected by the recession that has taken parts of the rest of the country by storm."

The 2.5-per-cent rate offered by Hubert compares with 2.2 per cent from AcceleRate Financial, 2.1 per cent from Peoples Trust and 2 per cent from Achieva Financial, Ally, Canadian Tire Bank, MAXA Financial, Outlook Financial and several credit unions. Fringe players, for sure. But all are members of deposit insurance plans, be it Canada Deposit Insurance Corp. or provincial credit union deposit insurance.

Hubert is like most of its competitors in not having any minimum balance requirements, but it's unusual in requiring new clients to buy a $5 share in the organization (it's refundable if you leave). Another consideration is whether the premium 2.5-per-cent rate is just a teaser that won't last.

Mr. Bergen suggested it's the economy and its impact on loan demand that will determine how long the 2.5-per-cent rate lasts. The cost of running Hubert's rather spartan online operation should not be a problem.

"We recently opened three new Sunova branches, and each new branch cost us just under $4-million," he said. "Hubert's launch cost just under $100,000. Day-to-day staffing at a new branch costs us upwards of $50,000 a day. Hubert costs us about $1,000 per day."

Let's use Hubert as an example of how to research whether an online bank's high-rate account is right for you:

-To what extent are deposits insured? Deposits at Manitoba credit unions are 100-per-cent covered, while CDIC caps coverage for a bank's customers at $100,000 per depositor.

-How can I transfer money in and out? Hubert allows online transfers of money to and from a chequing account at another financial institution – that's a must.

-Who's the owner? Sunova, Hubert's parent, is among the 50 largest credit unions in Canada and has been around for more than 50 years.

-Do you offer tax-free savings accounts with the same high interest rate? Hubert offers TFSAs at 2.5 per cent.

-Are there any withdrawal or account maintenance fees? Typically, the answer is no. Hubert initially charged a $2.50 withdrawal fee, but then eliminated it.

The price of dealing with alternative banks offering high rates is that you don't have the comfort level you would with a big brand name. So why not give the likes of Hubert a try before making a big deposit? Set up an account, transfer a bit of money in and see how you like the service.

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Here's a rundown on some high-interest savings accounts with rates that are very competitive with the payouts on bonds and GICs.

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