Today’s reality of rising interest rates affects Canadians financially in many different ways. On one hand, higher rates mean you’ll spend more to borrow money; this is on everything from mortgages and loans to lines of credit. On the other hand, you’re also earning more on the money you save. Whether it’s in a high-interest savings account or GIC, it’s easier for your money to make money.
In fact, GICs are gaining considerable momentum with Canadian savers thanks to the impact of rising rates. Investors are taking notice that GIC rates today are the best they’ve been in a long time, and are moving money into this savings vehicle at levels not seen in a while.
Which begs the question: Is it time for you to put some money into a GIC? Let’s first start with some GIC basics because it’s likely there is an entire generation of savers who are unfamiliar with the pros and cons of GICs in Canada. And for the rest of us, a refresher couldn’t hurt because some things may have changed along the way.
What is a GIC?
GIC stands for Guaranteed Investment Certificate. With a GIC, you’re guaranteed the money you’ve invested (the principal) and also the interest the institution will pay you. The GIC interest rate is locked in (i.e. fixed) when the GIC is purchased and no matter what happens during the GIC’s term – whether GIC rates increase or decrease – the interest rate of your purchased GIC will not change.
Of course, like any good rule, there are exceptions. For example, there’s a relatively new GIC product available called a market-linked (or equity-linked) GIC. These GICs still guarantee your principal investment but not necessarily your rate of return. Instead, your return will be dependent on the performance of the markets. There’s also a variable rate GIC. This GIC rate is tied to the prime rate which may fluctuate over the course of the GIC’s term.
How often do GIC rates change?
Fixed-rate GIC interest rates shadow the changes in the Bank of Canada’s benchmark policy interest rate. When the policy interest rate increases (or decreases), rates for new GICs will often follow. However, it’s important to note that GIC rates are not the same as the Bank of Canada’s benchmark rate; these are two entirely different interest rates and will likely differ in the actual set percentage.
For years, GIC rates – much like the Bank of Canada’s policy interest rate –were quite low. But times have changed, and today’s GIC rates reflect this new reality.
There are two basic types of GICs: non-cashable and cashable. Depending on the institution they may also be known as non-redeemable and redeemable.
- Non-redeemable GICs are locked-in for the term selected, and terms can range from 30 days to 10 years . Most of these types of GICs do not have an out clause, and if they do, there will be a financial penalty for cashing them in early.
- Cashable GICs can be redeemed early in a pinch, usually after 30 or 90 days of being purchased. This convenience, however, comes at a cost, too. The interest rate for cashable GICs is considerably lower than the non-redeemable equivalent.
There are many merits to investing in GICs, but they are not for every lifestyle or financial situation.
- Your principal investment is safe. Unlike some investments, there’s no chance you’ll lose the money you’ve put into a GIC.
- The interest earned is locked in. Unless you buy a market-driven or variable rate GIC, volatility is non-existent.
- You can hold GICs within a RSP account, TFSA, or RIF.
- GICs makes it easy to not spend your money impulsively.
- There are generally no fees when buying a GIC or when cashing them in at maturity.
- GICs are automatically covered under the Canadian Deposit Insurance Corporation.
- Liquidity is limited. The money is tied up for the term of the GIC, even in an emergency. You can get around this with a redeemable GIC but the interest rate isn’t nearly as attractive as a traditional non-redeemable GIC.
- GICs are low risk, but they’re thought as low reward too. The interest earned is typically not greater than the rate of inflation. That said, if you’re looking to park some money, they’re better than most chequing or savings accounts.
Ready to give GICs another look?
GICs in Canada are gaining favour with investors and savers alike, and with GIC rates as high as 5.25% currently, it’s easy to see why. To learn more about Oaken GICs, book an appointment for an in-person chat or call us at 1-855- OAKEN-22 (625-3622). If you’ve already made up your mind and want to get a GIC , you can even apply online today in as little as five minutes.