The big five banks in Canada have dominated the landscape for decades, but things are starting to change. In the last few years, there have been more and more online banks and investment companies opening and their promises of lower fees, higher rates, and improved service are getting customers to rethink how and where they bank.
I made the switch to online banks a few years ago and haven’t looked back. And I’m not the only one. Millennials do things differently than their parents. My Dad STILL goes to the bank to take out cash every week (from the teller, gasp) and while he now has online banking, it’s not his first choice. I’ve been inside a bank one time that I remember over the past decade. And that was to pick up a bank draft when we were buying our house. Technology has made many of the everyday banking activities we do available online. We are internet children, and that’s how we want our banking.
Simplicity is one thing, but the fact that banks also do some borderline gross things is another thing altogether. And that’s what I want to talk about today. Whether you are banking at one of the big five, a credit union, or an online bank you should be aware of when you’re getting a good deal or when you’re getting sold a bag of garbage. Here are six way too common banking myths that you should be aware of.
If you’ve ever taken on a mortgage, then there’s an almost 100% chance you’ve heard the mortgage insurance sales pitch. And you know, it sounds like a great idea! Spoiler alert: it’s not. This is the banking myth that annoys me the most because it’s just bad advice.
The problem with mortgage insurance isn’t what it does but how it does it. Having insurance to cover the balance of your mortgage if you or your partner passes away is an excellent idea. The problem with mortgage insurance is that it only covers the remaining balance on your mortgage. If you have a $300,000 mortgage, you will only get the full $300,000 payout if you die right away. Every time you make a payment, your balance goes down and the bank has to pay less. If you die twenty years into your mortgage and you only have a remaining balance of $50,000, then they’re only paying out the $50,000. But you’re still paying the same exact same premium you’ve been paying the whole time. Not ideal.
A better idea is to get a term life insurance policy. That way you’ll be paying for a payout amount that won’t continue dropping as you pay off the mortgage. It also gives your beneficiary added flexibility because they can use those funds for anything. The insurance company will cut them a cheque. With mortgage insurance the bank will pay off the rest of the mortgage, there’s no option to get paid out.
Credit Card Balance Protection
This is another type of insurance the banks will try and sell you that you likely don’t need. This time it is insurance that will pay off some or all of your credit card balance if something happens like a job loss, disability, or death.
The reason it’s not great is because it’s pricey and there are way better options. The number one rule of using credit cards is to ALWAYS PAY YOUR BALANCE IN FULL EVERY MONTH. I know you know that. And if you do that, then you will never require balance protection insurance. There’s no balance to protect. You may also have disability insurance, life insurance, or an emergency fund that can provide income in situations where balance protection would step in. Those are all better, more flexible, and more cost-effective solutions.
It’s worth checking to see if you are paying for balance protection and might not even know it. Sometimes it’s a tricky little checkbox on the application. Take a look through your credit card statement and see if there are any additional charges. Usually, it’s charged monthly. If so, take a look at your cardholder agreement and see what exactly it covers and if it makes sense for you. If not, call the company and cancel it.
Maintaining an Account Balance
Have you ever seen an ad for a free bank account that has that sneaky little asterisk that says “with an account balance of $4,000”? Mmhmm. This is how the big banks are tricking people into thinking their bank accounts are free. Sorry folks, they’re not.
Sure, if you maintain a balance in that chequing of $4,000, you won’t pay the monthly fee, but that’s a fair chunk of change to have sitting earning next to nothing. Most standard chequing accounts with the big banks offer no interest or a ridiculously small interest rate of say 0.01%. By keeping a balance, you’ll save the $10+ monthly fee but is it worth it?
Instead, you could choose an online bank where you’ll pay no monthly fee no matter what your balance is and you can instead put that $4,000 into a high-interest savings account. You’ll still save the $10+ a month, but you’ll also earn almost $100 a year on that balance. I’ve been using the EQ Bank Savings Plus Account, and they are paying 2.3%* interest.
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.
Unposted Interest Rates
Wouldn’t life be easier if you never had to negotiate for services? Companies would always offer you their lowest rate, and you wouldn’t have to make that annual call to see what they’re willing to offer. What can I say, I have big dreams.
The banks are no different. They live for the negotiation game because they know not everyone is willing to play. Instead of showing you their best rates upfront, you have to work for it. This is particularly true for mortgage rates, but it also applies to fees and interest rates on loans or credit cards. You should never accept their first offer, or whatever is posted on their website.
Call up a few different companies, tell them what you want, and see what they’re willing to offer. Then hang up and do it all over again with a different company. Pit them against each other until you come out with the best deal or you’re ready to claw your eyeballs out. Even a few rate points lower on a mortgage can mean thousands of extra dollars in your pocket. It’s worth it.
Lack of Fee Transparency
Do you know how much you’re paying for your investments to be managed by the bank? If you think nothing, then I’m sorry to burst your bubble, but you’re wrong. When you buy mutual funds, the fee isn’t always transparent because it’s embedded within the fund. Instead of seeing a line item on your statement every month, you do have to do the math yourself or wait for the annual fee statement that companies are now required to send out.
The embedded fee on mutual funds is called the MER (management expense ratio), and it pays for the portfolio manager, trading fees, reporting, and your advisor. Sure, you might not cut your advisor a cheque directly, but that doesn’t mean you’re getting their services for free.
To find out the MER on a mutual fund there are a couple of places you can look. First is the ‘Fund Facts’ document. You’re supposed to receive that every time you buy a fund. The second place is that annual fee statement. You can also find the fees listed on the companies website, but that can get confusing because most funds have numerous different versions. If you’re stuck, ask your advisor to send you the ‘Fund Facts.’
One thing to note, I’m not at all anti-advisor. I think they can be a super valuable resource for people who don’t have much interest in learning about or managing their investments. Just ensure you know what you’re paying and that the service they are providing is worth it.
The final banking myth is that the big banks are safer than other institutions. Yes, they have a long history of success and likely aren’t going anywhere anytime soon, but when it comes to the actual protection of your assets, they tend to have the same insurance coverage you’ll find elsewhere.
When you’re looking for a financial institution, you want to ensure your money is protected. In Canada, this means that they have coverage through CDIC for banks or CIPF or MFDA insurance for investment firms. Usually, they will brag about this near the bottom of their homepage. If you don’t see it, then move along.
I won’t go into all the details here (read this post for that) but what it means is if your bank is covered by one of those organizations, then you will be reimbursed for losses if your bank goes belly up.
Is there a better chance of BMO outlasting EQ Bank or one of the newer online banks? Probably, but that doesn’t necessarily mean that your assets are any less safe. Don’t trade lower fees and higher interest rates for a false promise of added security.
At the end of the day, banks are in the business of making money. They will do what they can to make a buck, and as a consumer, you need to be aware of when you’re getting a good deal or when you’re getting fooled by banking myths.
This post was proofread by Grammarly.