Is a GIC better than a high interest savings account?
Whether a GIC is better than a high-interest savings account depends on numerous factors, such as your financial goals and need for liquidity. If you want a good interest rate but also want quick and easy access to your cash, then a HISA is likely a better choice.
A GIC (guaranteed investment certificate) is a safe and secure investment with very little risk. You don't have to worry about losing your money because it is guaranteed.
Advisors say GICs make sense for short-term financial needs and investors who need peace of mind, but warn profits are taxed at a higher rate than capital gains or dividend income.
Cons: Low return – GICs are low-risk investments, which means they offer lower returns as opposed to stocks or mutual funds. Limited liquidity – Other than cashable GICs, your money is locked in for a set timeframe, which means you're unable to access your funds should you need them.
GICs provide a secure, fixed return, whereas mutual funds, traded on the stock market, involve potential gains and losses. GICs have locked terms, making them less liquid, while mutual funds offer more flexibility when it comes to cashing out.
GICs are an ideal investment toward the end of your career and during early retirement because they offer better returns than you can get from a savings account with almost zero risk. Long-term GICs can also help you set aside money for later-in-life expenses.
GICs provide security on your initial investment
GICs protect what you invest so no matter what happens with the market, you'll never lose your initial investment. When you invest in a GIC, you're lending your money, knowing you'll get it back in full by a specific date and with interest on top.
Bonds rebounded in the years following negative returns, earning more than double the return of GICs in 1995, 2000, 2014 and 2023.
| Option | Interest Rate (Typical) | Fees |
|---|---|---|
| Traditional Savings Account | 0.05-0.25% | $0-$13.95/month, plus additional transaction fees |
| High Interest Savings Account | 0.50-1.50% | Typically $0, but $5/transaction over allotted amount |
| Government Savings Bonds | 1.00% | N/A |
| Regular Bonds | 1.50%+ | N/A |
The bottom line is that GICs still hold considerable appeal for cautious investors. However, GICs have historically not been a great investment. Over the past 20 years, they have barely kept pace with inflation. Right now, other assets seem poised to produce superior returns.
Why not buy a GIC?
GICs are illiquid
The most common reasons for wanting the flexibility to sell at any time are unexpected expenses or to rebalance a portfolio during a bear market for stocks. GICs are locked-in and cannot be sold before maturity. While cashable GICs are available, they come with less attractive rates.
GICs and high-interest savings accounts have quite a bit in common. Both are extremely safe investments that offer guaranteed (albeit, modest) gains while ensuring you won't sustain any losses.
laddering provides you with both accessibility and the opportunity to benefit from the longer term GIC rates. Over time, it allows you to potentially earn more than you would by investing only in 1-year GICs.
- Hubert Financial and Ideal Savings – 4.75%
- Achieva Financial, Outlook Financial and Wealth One Bank of Canada – 4.70%
- Peoples Trust Bank of Canada, Oaken Financial, MAXA Financial and ICICI Bank – 4.50%
- EQ Bank – 4.45%
- Motive Financial – 4.35%
Different returns and risk
Even then, you have no risk of losing the original amount, especially if it's a GIC from a big bank. On the other hand, mutual funds have greater risk as they are traded on the stock market.
GIC interest is taxed based on your marginal tax rate. This is the tax amount you pay (federal and provincial) based on your income, where you live, and what tax bracket you're in. For example, if you put $1,000 in a GIC that has a 5% interest rate, you will earn $50 in the first year.
You can earn 5% or more with several savings accounts, including the Milli Savings Account, Betterment Cash Reserve, Newtek Bank High Yield Savings Account, and more. You can also earn above 5% with several accounts through Raisin, an online savings marketplace that sets you up with high rates from partner banks.
A Guaranteed Investment Certificate (GIC) is a secure, low risk investment that guarantees 100% of your original principle, while earning annual interest at a fixed or variable rate based on a specific formula. Like savings accounts, GICs are CDIC eligible at most financial institutions.
Canadian retirees should invest in the stock market as they are quite likely to still have a relatively long investment horizon to benefit from. The amount of their investment portfolio that should go into bonds, and the amount that should go into stocks depends on personal goals and risk tolerance.
A GIC is a secure investment that guarantees the principal you invest and your interest. The term can range from 30 days to five years, and your money will be locked away during that time.
Is it better to buy bonds or GICs?
Bonds may offer potentially higher yields (interest rates) but will fluctuate in value. GICs provide a fixed yield because there is no market in which to sell the GICs. Thus, investors in bonds can see values fluctuate before maturity, while GIC investors will not see these fluctuations.
If you have a redeemable GIC, you can cash in your investment before maturity, subject to certain conditions. If you have a non-redeemable GIC, you'll have to wait until the investment matures.
The biggest risk you may face with GICs is the potential for capital erosion, or the potential for your GIC's interest rate to lag behind the current rate of inflation. For example – let's say you invested $10,000 in a 1-year GIC, with an interest rate of 2%, but the inflation rate was 3% over the same term.
- 1-year GIC rate: 5.50% (MCAN Wealth)
- 2-year GIC rate: 5.25% (MCAN Wealth)
- 3-year GIC rate: 4.90% (MCAN Wealth)
- 4-year GIC rate: 4.85% (WealthONE Bank of Canada)
- 5-year GIC rate: 4.75% (MCAN Wealth and WealthONE Bank of Canada)
It depends on your investment goals. A GIC is an investment that pays a modest, fixed interest rate, while a TFSA is an account that can hold diverse investments.
