These are GICs not held inside a registered account. So, it’s essentially the opposite of the above GICs. There are tax implications on the interest earned, and there is no limit on what you can invest in non-registered GICs.
This GIC performs according to a specified market and it only guarantees your principal deposit. With one foot in a GIC and the other in the stock market, these products may be right for those looking for a slightly higher amount of risk with the possibility of greater rewards.
Foreign currency GICs
These are GICs in currencies other than Canadian, usually in U.S. dollars. This might work well for someone who travels or works frequently in another currency.
Terms of GICs
Shopping for a GIC is easy, but it’s not quite as simple as looking for the best GIC rate. To choose the best product for your circumstances, you’ll want to also think about the terms. Your plans for the money will dictate what’s best for you.
Short-term GICs take less than a year to mature. The principal is guaranteed along with an advertised rate of interest. These products are a good way to get a bit more out of your investment without sacrificing much liquidity. Long-term GICs have terms of one year and more and typically have higher interest rates than short-term GICs. When strategically purchased, these products can be used to generate part of a risk-averse investor’s monthly income.
GICs can pay out monthly or annually. If you need access to interest accrued on a regular basis (for example, as part of your monthly income), you’ll want the former.
How GIC deposits are insured
GICs are guaranteed, which is one of the reasons why they are such a popular investment. These protections are many-fold, starting with the guarantee of the financial institution they are purchased from. They are legally obligated to return to you your initial investment plus interest (depending on the product you choose).
But what happens if the financial institution goes belly-up? Then the next level of protection kicks in: Many GICs are protected by the Canada Deposit Insurance Corporation (CDIC) but some—particularly those purchased through credit unions—carry coverage through provincial organizations. The CDIC covers typically up to $100,000 on deposits with terms of less than five years, and does not cover foreign currency GICs.
Provincial insurers vary by province. Insurers in Alberta, British Columbia, Manitoba and Saskatchewan cover all deposits accepted by the institution with no maximum. In Quebec, savings and GICs of up to $100,000 are covered, plus RRSPs with a $100,000 limit in Quebec. In Ontario, savings of up to $250,000 are covered, while registered accounts (including RRSPs, TFSAs and RESPs) are fully covered. In New Brunswick, Nova Scotia and Newfoundland and Labrador, savings, GICs, and RRSPs of up to $250,000 are covered and in Prince Edward Island the insurer protects savings and GICs of up to $125,000 and unlimited RRSPs.
How can I purchase a GIC?
GICs are available from banks and other providers. But before you contact a GIC issuer, it’s important to decide how much you’d like to invest. Minimum investments can range from $100 to $5,000, depending on the institution. So the amount you’d like to invest will narrow down your options. Then, shop around for a variable or fixed rate and decide on the accessibility and flexibility you wish for the funds. Finally, once have your requirements of a GIC noted, contact the financial institution and provider of your choosing to start the process of purchasing.
You will either have an existing account setup with the financial institution or will have to submit an application and pieces of identification to verify your identity, including your Social Insurance Number (SIN). Once the account is created and linked to your primary funding source (like a chequing account), the principal investment is withdrawn and the GIC is issued. The rate table above can connect you to some of the top options in Canada right now.
You can also go into a branch to purchase a GIC. Once again, the process is easier if you already have a profile set up with the financial institution; but if not, you’ll need to make an appointment with pieces of ID, including your SIN, complete an application and follow the institution’s process to fund and issue your GIC.
Deposit brokerages help you do the research and are tuned into the best options on the market today. They are also aware of insurance protections to ensure your investment is covered if the issuer goes bankrupt. They work with multiple banks, so you can dig through an assortment of rates and terms to find the option that works best for your needs. The broker is paid by the financial institution. Consumers should always pay the financial institution directly—not the broker. As brokers often bring multiple consumers’ investments to banks, those consumers are sometimes able to benefit from better rates—similar to the benefits of shopping in bulk.
Are GICs the right investment for me?
GICs never give you the highest investment return compared to something riskier, like exchange-traded funds (ETF) or individual stocks, but they are a safe way to ensure your principal and interest are protected. Depending on the GIC purchased, it can also lock away money you may need for some time, so it’s important to pick the correct term to ensure you can access your money when you need it; and shop around for a competitive interest rate. Keep in mind that if a GIC’s return is lower than the rate of inflation, your money could end up having less purchasing power at the end of your term than at the beginning.
Big banks don’t tend to offer great rates, so it’s critical to research across other issuers and brokerages, as well as ensure proper insurance is provided. Bottom line, GICs can be a great complement within a diversified investment portfolio to balance out some of the higher-risk products. But if you can tolerate a little more risk, there may be better products on the market for you.
How are GIC rates calculated?
The payment terms for GICs depend on the issuer and the product itself. GICs may pay interest monthly, every six months, annually, at maturity or on a predetermined/anniversary date.
In addition to the payout schedule, you’ll want to understand how interest is compounded for the GIC you’re considering.
- With simple interest, the bank pays interest on the initial principal only. This means that if you invested $100,000 into a two-year GIC with a 1.25% return, you’d receive $1,250 in interest every year. So at the end of year two, the interest payout will total $2,500.
- With compound interest, the bank pays interest on the initial principal and the interest earned at every interval. For the same investment as above, with compound interest, you’d earn $1,279.19 in interest after one year, and $2,515.52 at the end of the two-year period. That’s an extra $15.52.
Clearly, compound interest is the higher-paying option, but also pay attention to the payout schedule. In the above scenario, there’s an annual payout, but if it had compounded monthly interest, you would earn even more—at the end of your two-year term the CIC would have $2,530.18 in monthly compounded interest.
Remember that you are agreeing to the terms (the principal and how interest is to be paid) when you sign the GIC contract. Once that’s done, you cannot change the terms and conditions. The payout terms will affect the amount of interest you will ultimately earn so it’s important that you review them.
Why are GIC rates so low right now?
The Bank of Canada sets a policy interest rate, also known as the overnight rate. This is the interest rate at which financial institutions borrow or lend funds to each other, and it is almost always the lowest available rate at a given time. The rates offered for GICs are affected by the policy interest rate. When it’s low, the interest offered is also low.
Another thing to consider when looking at GIC rates is how they’re affected by inflation. GICs are term deposits, meaning that you essentially “lock” them in for a set amount of time. If, during that time, the inflation rate outpaces your interest rate, you’ll actually be losing money in real terms. In the example above, your $100,000 deposit would earn $1,250 in simple interest at the end of the term. But if the inflation rate is 2%, you’re actually losing 0.75%, or $750, annually. Deflation, on the other hand, can help your investments and increase the buying power of the money you earn. All of this is to say that inflation or deflation are important variables when you’re evaluating the GIC interest rates available to you.
Can you negotiate GIC rates?
Yes. Most people don’t even think of negotiating when it comes to dealing with their bank but having an in-person conversation can really pay off, particularly for those who have established relationships. If you’re unhappy with the GIC rate your bank is offering, ask for a better one. There’s no guarantee you’ll get it, but you can also shop around for a better GIC rate.
The best time to buy GICs
The best time to buy a GIC is when you’re saving up for a goal, like school tuition, a down payment or a trip. But it can also be good to invest with GICs when you’re risk-averse. You might be considering a GIC as a way to balance your portfolio or to generate some passive income in retirement or if you’re taking time off work to raise your family, for example. While GICs don’t tend to have the highest interest rates of all the investment vehicles available to Canadians, they do offer a low-risk way to store money while earning some interest.
If you’re considering adding a GIC to your portfolio, you’ll want to pay attention to a few key numbers. The interest rate of the GIC itself is a good starting point. Generally, the higher the interest rate, the more attractive the product. It also pays to look at the likely rate of inflation or deflation you can expect during the term to determine whether that factor is likely to eat into your profits or enhance them. If you find that the numbers work out, a GIC can be an excellent no-risk investment for a set period of time.
GICs vs high-interest savings accounts: Which is right for you?
If you’re looking for a secure, no-risk place to put your money that might also net you some interest, you might also be considering a high-interest savings account (HISA) instead of a GIC. HISAs have some things in common with GICs, but the two are very different products. Their relative merits and drawbacks can be seen through how they handle interest rates and terms.
While both GICs and HISAs offer interest, it is delivered differently. With a GIC, your interest rate is guaranteed for a fixed amount of time. So, for example, you might open a one-year GIC at a given rate. This means that when you leave your money in that account for one year, you are guaranteed that interest rate at the end. Often, but not always, the longer you leave your money in a GIC, the higher the rate you will get. And with a GIC, in most cases you’ve agreed to leave your money untouched for the length of the term. The penalty for early withdrawal is typically a loss or reduction of interest earned.
With a standard savings account, the interest rate can fluctuate on short notice, often in response to market forces and the Bank of Canada’s key lending rate. However, you can dip in to access your money whenever you like. (We compare the best high-interest savings accounts here.)
With this in mind, a GIC will typically serve you better when you’re saving for a specific goal to be purchased by a certain deadline, like a car or new furniture, or if you’re certain you won’t need the money until the maturity date. In these cases, you can put the money away with the peace of mind that your interest rate won’t spontaneously change. On the other hand, you can look to a HISA for everyday savings or emergency funds when you may need immediate access to cash. Both GICs and HISAs are secure. They’re both recognized as deposits and are therefore eligible for CDIC insurance when banking at an eligible institution.
Other investing options available
Bonds are loans given to the government or a company and, like GICs, are tied to a specifically stated term. They have variable return rates, depending on how they’re linked (government or corporate) but are more liquid in that they can be sold in the market at any time. While they aren’t insured by the CDIC like GICs, they offer easier access if you suddenly need to withdraw your investment. Bonds can also be held inside TFSAs, RRSPs or RESPs.
ETFs are a collection of securities, like stocks, that increase or decrease in value according to an index. They operate like a mutual fund in that they’re linked to the stock market and can be traded, making them easy to purchase and sell. The principal isn’t guaranteed like a GIC, but ETFs offer easy access (you can sell anytime) and may have higher earning potential, depending on market conditions. ETFs can also be held inside TFSAs, RRSPs or RESPs.
A mutual fund is a basket of investments that allows for diversification across stocks, bonds and other assets. It is professionally managed with an aim to outperform the market. You have to pay an annual management fee, called management expense ratio (MER), which and must be considered into the investment decision as a high MER could render a mutual fund’s returns dramatically less attractive, especially considering the added risk. As with ETFs, there is higher growth potential than GICs but the growth and principal aren’t guaranteed. Mutual funds can also be held inside TFSAs, RRSPs or RESPs. (Are you paying too much in fees? Find out.)
Stocks are an entitlement to a share of a corporation. Investing in stocks requires research on market trends, and their performance can be extremely volatile depending on the market and industry conditions, but they can also have significant growth promise. Stocks lack the diverse nature of mutual funds and ETFs, but can great tool for experienced investors to include as part of a diversified portfolio. Stocks can also be held inside TFSAs, RRSPs or RESPs.