A Guaranteed Investment Certificate (GIC) is a savings option where you agree to invest your money for a certain amount of time in exchange for interest payments. It’s considered a safe investment because your principal is secure. You're lending your money to the financial institution which sells you the GIC. Want to know more? Here’s a primer on everything GIC in Canada:
What types of GICs are there?
There are two different types of GICs available:
A Guaranteed Return or Fixed Rate GIC means you'll get the same interest rate on your principal throughout the whole term of your GIC. This is a great option if you want a less varied and therefore more predictable return on your principal.
A Floating or Variable Rate GIC means the interest rate is linked to the underlying performance of an index (index-linked) or equity investment (market-linked). Therefore, your return might change over the GIC's term.
If a predictable return is not your primary goal this type of GIC may appeal to you. Variable rate GIC’s have the potential for higher returns, if the index or market performs well over the term, however variable rate GICs also carry significant potential risks and opportunity costs if the market does poorly.
Understanding this risk/reward tradeoff is important in determining if a variable rate GIC is right for you. Regardless of whether you have a fixed or floating interest rate, your interest payments will usually be paid monthly, annually, or at the maturity date. At the maturity date, you'll get back the principal of your original investment.
How does a GIC work?
Unlike a traditional savings account, you need to keep your money in the GIC until the end of the investment term.
Terms can range from less than a year to 10 years. Interest on a GIC is typically paid on a monthly, semi-annual, or annual payment date. In some cases, the entire interest payment is made at the conclusion of the term (maturity date).
If you withdraw your money from the GIC before the end of the term, you may forfeit any interest earned on your investment. In many cases, you'll also have to pay a fee for early withdrawal. If you think you might need your money soon, consider investing in a no-penalty GIC.
No-penalty GICs also known as cashable or redeemable GICs, allow you to withdraw your funds at any time. However, the interest rates are generally lower than what you would earn with a traditional GIC.
Why should I consider a GIC?
GICs are a great option for someone who wants to grow their wealth in a low-risk way.
Unlike stocks, which might decline in value, or bonds, which the issuer might be unable to repay, the amount of money you invest in a GIC is guaranteed. GICs can be a great addition to your portfolio to help diversify its risk.
Most Canadian GICs with terms of five years or less are eligible for coverage up to $100k by the Canada Deposit Insurance Corporation. If you don't need immediate access to your money, GICs can offer higher interest rates than standard savings accounts. For example, many GICs pay 2% interest or more.
Typically, the longer the GIC's term, the higher the interest rate. In some cases, GICs may pay more than government bonds. GICs have relatively low minimum investments. In most cases, you will need to invest at least $500. However, certain products (including options with higher returns) might have higher minimums.
Drawbacks of GICs
While GICs are generally safe investments, they carry the risk of potentially not keeping up with inflation.
While a safe investment with a 2% rate of return might sound like a good deal, you'll actually be losing buying power if the inflation rate is 3%. Of course, 2% is still much better than a typical savings account (or keeping cash under a mattress), but you may want to mix in other higher-reward investments like equities to help keep pace with inflation.
You will generally pay tax on the interest payments you receive from your GIC. However, your earnings will be tax-exempt if you hold your GIC within your registered investment accounts like RRSPs, RRIFs, or TFSA.
What are some simple tips I should know about GICs?
There are many different types of GICs available. Use the following tips to help find a financial product that fits your needs. There are many tools and calculators to help determine which GICs are best for your specific situation.
1. Choose a term that fits your spending needs
One of the main features of a GIC is that you usually won't be able to use the funds you invest during the GIC's term. Therefore, you need to be careful about how long of a term you choose. While longer terms will usually have higher interest rates, longer terms also mean you won't have access to funds for an extended period of time.
If you are considering a large purchase like a home or car, make sure you don't accidentally lock up too much of your money in a GIC. It's also important to have enough cash on hand to deal with any emergencies that pop up. If you know you'll need to use the funds in a certain time frame, choose a GIC with a term that ends before you plan to make your purchase.
2. Ladder your GICs
If you are on a fixed income and want to live off your GIC's interest payments, consider laddering your GICs.
Laddering involves buying multiple GICs at specific intervals, which results in you receiving predictable interest payments. If income is important to you, consider GICs that pay monthly interest instead of annually or at maturity.
To illustrate, you could buy a one-year GIC every two weeks. Then, you'll receive a steady stream of monthly interest payments. Plus, starting a year after your original investment, you'll get your principal back every two weeks in case you need to make any purchases. You can often schedule reinvestments, so you don't have to deal with rolling over your funds into a new GIC. However, having the option to withdraw your funds at the end of the term gives you the flexibility to take back your principal investment every two weeks if needed.
3. Choosing a fixed or variable interest rate
If you're risk-averse or plan to live off your GIC's interest payments, a fixed-rate GIC is likely the best option for you. Having a predictable stream of income can give you peace of mind. However, if you want to opt for a higher return, you could consider a variable-rate GIC. If national interest rates rise, you'll get paid more. However, it's also possible you'll earn less than with a fixed rate. Variable-rate GICs have a higher risk and higher reward.
Who has the best GIC rates in 2019?
Knowing your financial priorities before making an investment is always advisable. Once you’re ready to make the commitment, do your research and shop around to compare rates. Here are some of the best GIC rates you’ll find this year:
Oaken: 5-year Registered and Non-Registered offered at 2.85% With a minimum investment of $1,000, Oaken considers itself a refreshing alternative to a traditional financial institution. They are backed by Home Bank and powered by Home Trust company, Canada’s largest independent trust company serving Canadians since 1997.
EQ Bank: 5-year Non-Registered GIC offered at 2.65% Another option, EQ Bank’s all-digital approach to banking helps customers save money. EQ Bank is backed by Equitable Bank, a federally regulated Schedule 1 bank with over four decades of experience in the Canadian market, and total assets under management of almost $20 billion.
Many financial institutions offer GICs, each with their own terms. By doing your research, you can find the balance of investments that fits your specific needs.