As you well know, to build wealth, it takes more than savings to compound away to grow your portfolio into something meaningful. That said, keeping cash savings secure or guaranteed in some cases can be very smart.
What are GICs?
What are the best GICs to consider and why?
What are the best GIC rates in Canada in 2023 – and who are those providers?
Read on to learn more about the best GIC rates in Canada.
What is a GIC?
A GIC stands for a Guaranteed Investment Certificate.
GICs work like an interest savings account but the rate can be higher and is typically aligned to a term (i.e., holding period).
GICs and savings accounts are not the same though. There are two key features we want you to know about:
1. Term/Holding Period
The money you deposit into a GIC will need to be held for a certain amount of time as specified in the contract, so, the “term.” This is one-half of the guarantee per se and your side of the agreement. GIC terms can be as short as 30 days and far longer, as in 10 years.
Short-term guaranteed investment certificates (GICs) related to terms of less than one year – anything from 30 to 364 days. Financial institutions will guarantee the principal (the original investment) plus an advertised rate of interest, but the shorter the term, the lower the interest rate.
We’ll discuss pros and cons of GICs and various terms later.
In any event, once your money has been deposited with the GIC, it should remain in the account to earn the interest rate promised and stipulated in the contract. That’s the other part of the guarantee per se, you promise to keep the money there and the financial institution will promise to pay you a certain rate.
Long-term guaranteed investment certificates (GICs) are simply GICs with terms > 1 year. In any Google search you’ll read about terms of 2, 5, and upwards of 10-year terms. Again, financial institutions guarantee the principal (the original investment) plus an advertised rate of interest as part of the guarantee. Generally speaking, the longer you lock-up your money in a term the higher the interest rate.
For today’s post, we’re largely going to ignore any terms longer than a few years.
While long-term GICs are important if you want invest your money for an extended period of time (and wish to avoid losing your original investment amount in the process), we believe GICs are best served for near-term savings for upcoming expenses. If you choose a 3-year term, for example, you must be mindful that your funds must remain in the GIC for 3 years until the term expires. The longer the term, the longer your money will need to sit in the account. A GIC term for 5 years let alone 10 years is a LONG time to lock-up money – especially at current guaranteed rates of just a few percent interest.
Other rreasons to avoid locking-up money for long periods of time (at low-interest rates) relate to the opportunity costs when compared to other investment choices for wealth-building (i.e., stocks) AND the long-term wealth-killer known as inflation to combat.
Related Reading: What is inflation, deflation and stagflation?
This is why you need to think long and hard about GICs – while beneficial products near-term – your money is not easily accessible or liquid as it would be in an interest savings account.
2. Interest Rate
The other key feature that we’ve already captured a bit above related to GICs is the interest rate to be paid. We believe beyond term as your first consideration (i.e., locking up the money), the interest rate that is to be paid is a crucial feature to consider before you take out a GIC.
When you buy a guaranteed investment certificate (GIC), you lend money to a financial institution for a specified amount of time/term PLUS when the GIC reaches its maturity date, you get your money back plus interest—again, the longer the term, the higher the interest rate. There are some GICs that pay interest during their term, either monthly, every few months or annually – so make sure you ask the financial institution about any GIC product details including interest payment frequency and structure. GICs can also have either a fixed or a variable interest rate.
In general, shorter terms usually have lower interest rates, while longer terms typically have higher rates.
What about cashing out?
Well, you can – but for most GIC products if you withdraw funds early, you will likely have to forfeit any interest earned and/or pay an early withdrawal fee. Not all GICs are created equal so you might want to consider a cashable GIC if there is any chance you might want the money out prior to the end of the originally agreed-upon term.
If I might cash out, why buy a GIC at all?
Ha. Good question!
Personal finance is personal, right?
GICs offer a safe way for people to invest their money with minimal risk. We have “safe way” in italics because no investment is risk-free and all investments have trade-offs in our opinion:
- Cash flow is always king but cash savings is pretty darn close. Cash savings are liquid but can be beaten up a bit by inflation over time if you keep too much cash and avoid investing it.
- Bonds are subject to interest rate risks and inflation risks as well. While bonds can be smart for portfolio rebalancing, riding out stock market volatility, and also saving for near-term expenses – there are no guarantees involved like GICs can offer. More on that below.
Related Reading: Why would anyone own bonds right now?
- Common stocks and equities are great for wealth-building (one of us is semi-retired and the other is on his way!) thanks to long-term investing in dividend-paying stocks and low-cost ETFs. That said, you need to have an investing plan and discipline to build wealth with equities over time – and stocks are no place to get-rich-near-term since they can and do go down in price dramatically often in very short time periods. Have you been watching the stock market lately???
Related Reading: Build long-term wealth using our diversified model ETF portfolios.
Why buy a GIC at all?
GICs “work” because they have two protective measures beyond cash, bonds, stocks and other investment options:
- Our Canadian financial institutions that issue GICs are legally obliged to repay investors’ principal and interest, and related to this,
- If a GIC issuer goes bankrupt, your bank account and registered accounts at separate banks and credit unions (which may contain GICs), are eligible for coverage of up to $100,000 each by the Canadian Deposit Insurance Corporation (CDIC). GICs that you own are insured as long as they are issued in Canadian dollars, the term is five years or less and the company that sold it to you is a member of CDIC. (FYI – this is a credential that all major Canadian banks hold.) Credit unions are members of the deposit insurance corporation of the province where they operate and may have a smaller insurance repayment policy, so check before you open an account or purchase a GIC with a credit union.
These government-mandated standards ensure you are compensated if a CDIC-insured GIC issuer goes bankrupt. That’s also a pretty nice feature related to the guarantee.
What types of GICs can I buy? What are the best GICs to consider?
There are various types of GICs, which can influence the exact interest rate offered:
Fixed-rate GICs pay a predetermined interest premium each term. A specific amount of interest will be payable at certain periods throughout the term.
Some GICs link interest payments to a fluctuating benchmark, usually the institution’s prime rate. These types of investments are called variable-rate GICs – and the benefit is: it will prevent you from missing out on potential interest-generated gains because your nominal returns grow as interest rates do.
There are also equity-linked GICs. The interest rates on these are not determined until maturity. If the market underperforms, you may see no return except for your original principal, which is guaranteed. (Not the best deal!)
You might also want to consider escalating-rate GICs. These GICs increase the interest rate that you are paid overtime. Let’s say you buy one that matures in three years. That GIC product might pay you 1% in year 1, 1.25% in year 2, and then finally 1.5% in year 3. These GICs give you a bigger incentive to stay invested, usually generating the best interest in the final year of the term. Like fixed-rate GICs, this type of product does not protect you against inflation.
These are just some of the products you can buy.
What about these non-registered or registered GICs? Does that matter?
You should know that GICs can be owned in both non-registered and registered accounts.
Again, on our path to wealth-building, we haven’t owned GICs at all and don’t intend to.
GICs can however be owned in various accounts:
- Non-registered accounts – such as a bank account/taxable account.
- Registered accounts – Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) as examples.
What are the best GIC rates in Canada?
You’ve got the basics and we’ve outlined some pros and cons when it comes to owning GICs for today’s post.
Check out our table below for the *best GIC rates in Canada to consider from some leading providers, *information current to the time of this post!
Information below focuses on non-registered rates…
|1-Year Term Rate||2-Year Term Rate||Min. Investment||GIC Type / Comments|
|EQ Bank||5.00%||4.75%||$100||Non-registered; one of our favourites (we use them personally). They consistently have among the highest rates for both Savings accounts and GICs!|
|Wyth Financial||Now part of EQ Bank!||Now part of EQ Bank!||N/A||Now part of EQ Bank!|
|Achieva Financial||4.80%||4.85%||$1,000||Non-registered; provincially insured|
|CIBC||4.65%||4.40%||$1,000||Non-registered; may include bonus rate|
- Other providers exist but these are our leading/best-of GIC rate in Canada providers right now.
- *Current to time of post. We will continue to update this post periodically for the accuracy of content and rates. All rates are subject to change without notice.
- We focused on 1-year and 2-year terms since anything less than one year could likely be maintained in cash savings and any amount more than 2-years could be considered for bonds, depending on your savings plan of course!
We keep this content updated, but so does our friends at Million Dollar Journey!
Best GIC rates in Canada summary
While we’ll always have a bias to dividend-paying stocks and low-cost ETFs for wealth-building (and maintaining that wealth!) in our portfolios, there are a handful of reasons why GICs might work for you with some of the rates above:
- Guaranteed (small) returns. All investments have risks but with GICs, your principal and interest are guaranteed over the term of the GIC.
- Bankruptcy or insolvency insurance. We believe you can invest in confidence thanks to CDIC. If your financial institution fails with your GIC asset, rest assured you’re covered – your money is guaranteed for up to $100,000 for each product. For example: if you have three GICs in your TFSA, RRSP, and within a non-registered account, up to $300,000 will be protected. Nice!
- Minimize stock market volatility. Stocks rise, and fall, dramatically. The bond market is no picnic either. Some GIC products offer stability.
- A variety of GIC product options. Choices abound. Fixed vs. variable. Short-term vs. long-term. Market-linked or not. Taxable investing vs. registered to invest. The choice is yours.
If you have specific near-term or short-term expenses in mind and you want more than cash savings on hand or at least higher interest payments than interest savings accounts – GICs can be your ticket. That could be saving for a major purchase such as a house and/or deploying some certain capital for a new business. With GICs, you have access to cash in a certain term, guaranteed.
GICs produce secure income and a safe, insured place to stash your cash although you’ll need to lock it up as part of your part of the bargain and GICs could be losers to inflation over any term. The fine line between financial safety and growth rests with you!
Improve your retirement readiness at a low cost!
Everyone has a different path on their asset accumulation journey – with cash, GICs, bonds, stocks, real estate and more. We know. At Cashflows & Portfolios, even though we both own 7-figure investment portfolios now, we’ve built our respective portfolios similarly but differently. The common denominator on our retirement readiness path is we absolutely keep some cash and hold mostly equities – although we won’t rule out GICs in the decades ahead…
Whether it’s a better understanding of GICs or navigating the alphabet soup of RRSPs/RRIFs, LIRAs/LIFs, CPP, OAS and more – I know we can help you out.
We answer client questions such as:
- What registered accounts do I draw down first?
- How much income will my investments generate?
- Do I have any idea how long this income might last?
- What amount of taxes will my portfolio incur?
- When should I take my workplace pension?
- And much, much more…
Knowing how to demystify the retirement income puzzle is not trivial work but it’s absolutely something we can help with – we’ve helped dozens of clients in the last few months alone!
If you are interested in obtaining private retirement projections for your financial scenario, please contact us here to get started.
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