How GIC interest rates work
Presented By
MCAN Wealth
Find out what factors affect GIC rates and how to buy these low-risk investments.
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Presented By
MCAN Wealth
Find out what factors affect GIC rates and how to buy these low-risk investments.
Guaranteed investment certificates, or GICs for short, are low-risk investments offered by banks and other financial institutions. In exchange for committing your money for a term ranging from 30 days to 10 years, the bank will pay you a guaranteed rate of interest.
GICs are particularly safe because they give you a guaranteed return, unlike other investments that have variable returns, such as stocks and bonds. And when you invest in GICs at a financial institution that is a member of the Canada Deposit Insurance Corporation (CDIC), your deposits are eligible to be protected by government-backed insurance up to $100,000 per eligible account.
The low-risk nature of GICs makes them ideal when saving for a big goal with a deadline, like a down payment on a home or a big vacation, as well as when you want to protect your capital—for example, if you’re approaching retirement or already retired. Let’s take a look at how GIC interest rates are determined.
GIC rates are primarily affected by the Bank of Canada’s (BoC) policy interest rate (also referred to as the target overnight rate or benchmark interest rate) and by market competition among banks for your deposits.
When the BoC raises the policy interest rate, banks must pay more to borrow money from each other. This cost is passed on to consumers in the form of higher rates for mortgages and lines of credit, but it also incentivizes banks to pay higher interest rates for deposits, including investments in GICs.
It’s a game of supply and demand. The more a bank requires deposits (cash for its offerings, like mortgages and loans), the more interest it will be willing to pay on its savings products. This often manifests as special offers, where a bank will pay above-market rates on some of its GICs. This not only creates better opportunities for investors but puts upward pressure on GIC rates as a whole.
Rates are also affected by a GIC’s features. You can usually earn higher interest rates by committing to longer terms, like five or 10 years. But that’s not always the case. But you can also earn more interest for selecting a non-redeemable GIC, which may not be withdrawn early. Generally speaking, the less access you have to your funds before the GIC’s maturity date and the more committed you are to leaving your money inside the GIC, the more interest you will receive.
Some GICs link interest rates to the performance of stock market indexes, combining the principal guarantee of a GIC with the potential gains of riskier investments—these are usually called market-linked GICs. Some market-linked GICs, for example, pay guaranteed minimum returns with the possibility of higher returns based on the performance of their respective index funds. You can choose from a variety of Canadian and U.S. indexes, and terms ranging from two to five years.
You can also take advantage of rising GIC rates using your registered accounts, including your registered retirement savings plan (RRSP) and tax-free savings account (TFSA).
When you invest in GICs inside your RRSP, you can defer the tax on your GIC income until you take withdrawals from your account in retirement. You may be in a lower income tax bracket than when you were working, making RRSPs advantageous. If you hold GICs in your TFSA, you can skip the tax on the returns altogether, subject to contribution limits. TFSA withdrawals are always tax-free.
There may be slightly different requirements when you buy GICs to hold in your RRSP or TFSA, though. Banks, credit untions and financial institutions may have their own different minimum term lengths or minimum investment amounts. Sometimes they offer different interest rates depending on the account type.
GICs can be flexible, safe investments. To earn the best GIC interest rates, sometimes the less flexible redemption options pay more, but not always. And don’t forget to make use of your TFSA and RRSP to save on tax and get even more out of your savings.
This is an editorially driven article or content package, presented with financial support from an advertiser. The advertiser has no influence on the creation of the content.
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