The Best GIC Rates
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What is a GIC?
GIC stands for Guaranteed Investment Certificate. A Guaranteed Investment Certificate is a type of Canadian investment typically issued by banks or trust companies. These types of investments require you to invest your money for a certain amount of time in order to receive a guaranteed rate of return.
How do GICs work?
In most cases, GICs require you to invest at least $500 and agree to leave your money in the account for a certain amount of time. This can be anywhere from 30 days to 10 years. Most GICs pay interest – and sometimes at higher rates than traditional savings accounts. GICs are considered a safe investment because your principal (the amount you deposited) is secure. This means you are guaranteed to get back the amount you’ve deposited once your term is done.
How much does it cost to invest in a GIC?
There is no fee to purchase and invest in a GIC.
Types of GICs
Depending on the financial institution, there are many different types of GICs offering different term lengths and interest rates. Short-term and long-term, registered and non-registered, cashable/redeemable and non-redeemable, market-linked… All these different terms can get confusing, so we’ve broken down a few of the main categories:
Fixed-rate vs. Variable-rate GICs
When signing up for a fixed-rate GIC, you agree to a specific rate at which your investment will accumulate interest. This interest rate can’t change throughout the term of your GIC, and therefore, you know exactly how much you’ll get in return at the end of your term. For example, if you want to invest $1,000 in a one-year fixed rate GIC at a two per cent interest rate that is compounded annually, you know from the start that your investment will be worth $1,020 when your investment term ends (or “matures”).
The interest rate for a variable rate GIC constantly varies throughout your term, depending on how well the stock market is doing. An investment with a variable interest rate is a higher risk than an investment with a fixed rate because you never really know how much you’ll earn in the end.
However, in both cases, your initial investment is secure – meaning you’re at least guaranteed to get back the principal value of your investment at the end of your term.
Registered vs. Non-Registered GICs
Registered GICs reap the benefits of special government-approved tax-sheltered savings plans like Registered Retirement Savings Plans (RRSP), a Registered Education Savings Plans (RESP), or a Tax-Free Savings Accounts (TFSA). Registered GICs can be held in RRSPs, RESPs and TFSAs.
Non-registered GICs are not registered with the federal government. As such, every year, earned interest must be claimed as taxable income when filing your taxes.
Cashable/Redeemable vs. Non-redeemable GICs
If you need to access the money in your GIC earlier than the agreed term length, you will most likely incur a fee or penalty and won’t earn the interest accumulated thus far, unless it is a redeemable or “cashable” GIC. Cashable GICs allow you to withdraw your money before the end of the term without penalty.
Short-term vs. Long-term GICs
Short-term GICs generally have terms of less than one year, while long-term GICs have terms that can last anywhere from one to 10 years.
Typically, the shorter the term, the lower the interest rate. But depending on your financial goals, a shorter or longer-term GIC may be better for you. For example, if you need to access your money soon (you want to buy a car or put a down payment on a home within the next year), a short-term GIC may be the better option, because you are still guaranteed the initial deposit with a bit of interest. Short-term GICs also give you the option to quickly reinvest your money in another account if interest rates rise in the future.But if you’re okay with locking away your money for a few years in exchange for a higher rate of return, a GIC with a longer term may be the right option for you.
Market-Linked (Equity-Linked) GICs
Market-linked or equity-linked GICs are a bit riskier than traditional GICs, because it is essentially part GIC, part stock market investment. While they still guarantee your principal deposit at the end of the term, the amount of interest you earn depends on the performance of the stock or equity market throughout that term. These types of GICs may offer a small amount of guaranteed interest, but they are appealing because they come with deposit insurance up to a limit and provide an opportunity for a much higher return if the market does well. Market-linked GICs are usually non-redeemable.
Foreign Currency (and U.S.) GICs
Some banks and financial institutions offer GICs in foreign currencies, such as U.S. dollars. When you invest money in a foreign currency GIC, it earns interest in that currency. This can be useful if the Canadian dollar drops, or if you’re visiting that country and want to withdraw some of your funds. U.S. GICs are the most common since U.S. dollars are accepted around the world, though banks do offer GICs and investments in other major currencies, like the British Pound of the Euro.
Note that U.S. GICs can’t be held in registered accounts, and the interest rates on foreign currency GICs can be low in comparison to Canadian GICs. Since foreign currency GICs are not covered by CDIC insurance, you also run the risk of losing your money if the financial institution fails.
How often is interest added to my GIC?
When purchasing a GIC, you can choose how often you want your interest compounded – meaning how often interest is added to your principal investment amount. For example, if interest is compounded quarterly, this means interest will be added to your initial investment four times a year.
How do I know which GIC to invest in?
Understand your financial priorities before investing in a GIC. Most importantly, understand how long you want to commit your money to an investment. Do you plan on buying a car and need access to your money within a few months? Or are you okay with putting away that money for five years?
And as always, do your research, shop around and compare options to make sure the rate you’re getting is competitive. You can quickly find the best fixed- and variable-rates available with ease at RateSupermarket.ca.
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