By MoneySense Editors on March 3, 2023
Estimated Reading Time: 2 minutes

How to ladder your GICs

By MoneySense Editors on March 3, 2023
Estimated Reading Time: 2 minutes

This strategy can help you get the most out of your GICs. Learn about the benefits of GIC laddering.

A smiling woman in work clothes holds a ladder

Image by senivpetro on Freepik

Guaranteed investment certificates (GICs), like other fixed-term investments, carry something called “interest rate risk.” If you have $20,000 to invest in GICs, for example, you have to decide whether to lock that money up for one year, two years, five years or even longer—but it’s very difficult to predict where interest rates are going.

If longer-term rates are higher, you may be tempted to go with those, but then you run the risk that rates might go up in the interim, and you’d be stuck earning less. Or maybe interest rates are really good now, but you’re worried that when your GIC matures in five years, you’ll be stuck renewing at a much lower rate.

Rather than guess, you can deploy a common investment strategy: GIC laddering.

Setting up a GIC ladder

When you “ladder,” you stagger the maturities on a series of investments (as with bonds or GICs). Imagine leaning a ladder up against the wall. Each rung up the ladder represents the next longest term available.

If you have $10,000 to invest in a GIC, you could put all $10,000 away for a term of five years, or you could ladder a series of GICs: $2,000 for one year, $2,000 for two years, $2,000 for three years, and so on.

Benefits of GIC laddering

Laddering GICs offers investors three benefits:

1. You don’t have to guess which term will give you the biggest bang, since you’ll have some money invested for each term.

2. Since you have a GIC maturing each year, you can take advantage of upward swings in interest rates—so there’s no fear of missing out. And if interest rates go down, only some of your money will be exposed to the lower rate.

3. As each GIC matures, you’ll have access to some of your money (plus interest). That’s more flexible than committing to a single longer-term GIC.

If you don’t need the cash right away, you could reinvest it into another GIC and keep your ladder going. And, if you invest the interest from the first GIC, you’ll be earning interest on that, too, a.k.a. compound interest.

Note that if your GICs aren’t held inside a registered account like a registered retirement savings plan (RRSP), you will have to pay tax on the interest you earn. Learn how GICs are taxed.

Compare the best GIC rates in Canada