Guaranteed Investment Certificates (GICs) have provided Canadians with worry-free investing for generations, by offering the safety of a principal and return guarantee. GICs are similar to savings accounts in this manner, however, there is usually a lock-in period where the investor does not have access to their funds. GICs are a solid choice for conservative investors, as well as anyone looking for a safe place for their short term savings.
GICs can be purchased inside a registered investment vehicle like an RRSP, TFSA, or RESP, or they can be bought as a regular, taxable non-registered investment. Beyond that, GICs can be grouped into various categories. Before we take a look at the best interest rates available today, let’s look at the different types of GICs you can purchase.
A non-redeemable GIC means that the investment cannot be withdrawn prior to the maturity date without a penalty being incurred. Before purchasing this type of GIC, you want to make sure that you won’t be needing to draw on the funds prior to maturity. So, if you’re planning a major purchase or a home renovation in the near future, make sure you’ve set those funds aside in a more liquid investment.
Redeemable GICs allow an investor to withdraw early without penalty, under certain conditions. An example would be a 5-year stepper GIC that is locked in during the year, but each year on the anniversary date can be redeemed without a penalty. If the funds are left in, the interest rate increases with each passing year, with the highest rates coming in the later years of the term. Financial institutions will offer a variety of redeemable GICs with different rules, and terms ranging anywhere between 1 and 5 years.
Cashable GICs usually have a duration of 12 months or less. They may require that you stay invested for a minimum of 30 to 90 days, after which you can cash the investment in full or in part without a penalty. Cashable GICs offer the most liquidity, but they also have the lowest interest rates.
Market-linked GICs are a popular offering of most of Canada’s big banks, who have chosen not to compete with credit unions and online banks when it comes to regular GIC interest rates. Market linked GICs are a blended product of sorts, combining the safety of a GIC with the return potential of a market investment, with conditions.
How Market-Linked GICs work
While shorter terms may be available, market-linked GICs of the 3 and 5 year variety are most common. When you buy a market-linked GIC, your return is linked to the performance of an underlying stock market index, such as the S&P/TSX banks index or S&P/TSX capped utilities index, up to a certain limit.
For example, let’s say you purchased a 5-year term with a maximum return of 25%. If over the 5 year period the index returned 30%, you would receive the maximum return of 25%, or an average of 5% per year. As you can see with the market-linked product, the potential return is higher than a regular GIC, but it’s not unlimited. If you invested in that index directly through the markets, you would have received a 30% return.
While you are limited on the upside, your principal is protected on the downside. Let’s say the same index had a negative return over the same 5 year period. In that case, you would retain your principal but realize a 0% return, although some market-linked GICs now offer a minimum guaranteed return, regardless of index performance.
If you’re wondering how any GIC issuer can offer market-level returns on a safety grade investment, it’s because they are able to profit on returns above the cap when the markets outperform, to protect investors’ principal when returns are negative. In other words, if the market returns 50% but your maximum market-linked return is capped at 30%, the issuer keeps the difference. These funds are used to cover market losses.
GIC Interest Rates
Because GICs are principal guaranteed, they are considered a safety investment. The primary benefit to the investor is the principal guarantee. The downside is that without exposure to the markets, GIC interest rates are only slightly better than your average savings account. In fact, in the current rate environment, your GIC investment will be hard-pressed just to keep pace with inflation.
GIC interest rates vary depending upon the characteristics of the individual investment. Cashable and redeemable GICs offer the lowest rates, while non-redeemable GICs provide a higher return. The aforementioned market-linked GICs, offered mostly by the banks, have a higher potential for return, but the return is not guaranteed. In general, credit union GIC rates are higher than what you’ll find at your bank, as are the rates at online banks. Let’s take a look at some of the top GIC interest rates available today.
Best GIC Interest Rates for 2020
At the time of this writing, these are the best rates I was able to find on GICs with a 1, 3, and 5 year term. Please note that I’ve excluded institutions that are not CDIC members. If you’re looking for a safe place to put your money, but you don’t want to lock your funds in,
Best 5-Year GIC Rates
Peoples Trust 2.40%
Oaken Financial 2.30%
EQ Bank 2.30%
Best 3-Year GIC Rates
Peoples Trust 2.30%
Oaken Financial 2.25%
EQ Bank 2.10%
Best 1-Year GIC Rates
Oaken Financial 2.10%
Peoples Trust 2.10%
EQ Bank 1.90%
Borrowing Against Your GIC
If you have money locked up in a non-registered or TFSA GIC, you can borrow against it using a liquid secured loan or line of credit, depending on what’s available through your financial institution. This way, you can continue to earn interest on your GIC, avoid the penalties associated with cashing out early, while getting a competitive borrowing rate on a loan or line of credit.
Generally speaking, loans secured by a GIC are priced slightly higher than a mortgage or Home Equity Line of Credit, but well below unsecured credit products. You may also be able to benefit from other flexible features such as interest-only payments.
GICs and CDIC Coverage
In Canada, most GIC products are protected by the Canada Deposit Insurance Corporation, providing that the GIC-issuer is a CDIC member. In addition to the principal guarantee, CDIC provides deposit insurance of up to $100,000 per registration. In the unlikely event that your financial institution was to become insolvent, your GIC funds would be protected. In its 50+ year history, over 43 CDIC member institutions have failed, but not one Canadian has lost a dollar of CDIC-protected money.
GIC Laddering Explained
GIC Laddering is a common investment strategy that involves splitting up your GIC money, across multiple terms with staggering maturity dates. For example, if you have $50,000 to invest in GICs, you could purchase $10,000 in terms ranging between 1 and 5 years. Traditionally, you renew $10,000 into a 5-year term each year, because in theory, the longer the term the higher the rate.
In recent years, GIC rates have flattened significantly, meaning that 1 and 2 year rates can often be similar to a regular 5 year rate. An alternative would be to invest the 5 year money in a market-linked GIC to at least get the higher potential return. Whichever approach you choose, laddering ensures that you have some money coming due every year, and that you are never investing all of your money when rates are the bottom.
Should I Invest in GICs?
After reading this article you may be wondering where GICs fit in your portfolio, if they fit at all. An answer to this question requires that you consider your asset allocation. That is, the balance between safety, income, and equity investments inside your portfolio. The truth is, even an aggressive growth investor should consider placing a small percentage of their overall holdings in safety investments, such as cash or GICs.
From there, you’ll need to decide how much liquidity you are looking for. Remember, the number one consideration of a safety investment is not the return, it’s principal protection and liquidity. If you are holding cash that you may need to draw on within 12 months, your best bet is to use a high-interest savings account through a credit union or online bank. That said, if you have some flexibility to lock your cash away for more than 1 year and you want the best potential return, a GIC might be the perfect solution.
Originally posted at https://maplemoney.com/best-gic-rates/