Why not to invest in GIC?
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. Opportunity cost – Investing in a GIC could mean you miss out on other investment opportunities that can offer you a higher return.
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.
He says GICs are best used for short-term savings goals, such as a downpayment for a home, a once-in-a-lifetime vacation, or to protect a portion of retirement income from temporary market volatility. However, the main risk is having your money locked in when the future path of interest rates is unknown.
Bottom Line. Given Canada's current high-rate environment and the expectation of rate cuts in mid-2024, GICs could be a solid investment for anybody looking to preserve capital and earn a stable return. If you're seeking higher returns, GICs are not the way to go.
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.
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 |
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.
High-interest savings accounts (HISAs) and guaranteed investment certificates (GICs) are reliable financial tools that can help boost your ability to save. GICs have higher interest rates but typically lock up your funds for months or years, whereas HISAs offer lower rates but much more accessibility.
Will GICs go up in 2024?
Typically, longer-term GICs offered better rates than shorter ones. Interest rates have been climbing since 2022, but economists predict that rates will fall in summer 2024. Thus, the rates offered on longer term GICs like 5 and 10 year terms are lower than 1 or 2 year rates.
| GIC provider | 1-year | 5-year |
|---|---|---|
| EQ Bank | 5.35% | 4.45% |
| Hubert Financial | 5.25% | 4.50% |
| ICICI Bank Canada | 5.00% | 4.50% |
| LBC Digital | 5.00% | 4.50% |
- Hubert Financial and Ideal Savings – 5.25% (1-year)
- EQ Bank – 5.35% (1-year)
- Saven Financial – 5.40% (1-year)
- Peoples Trust Bank of Canada – 5.35% (1-year)
- Achieva, Motive and Outlook Financial – 5.00% (1-year)
- Wealth One Bank of Canada – 5.35% (1-year)
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.
Recently, Canada's immigration minister, Marc Miller, announced updates to the GIC requirements for international students. Starting January 1, 2024, you will need to show double the amount of money in your GIC account—Can$20,635—to be eligible for a Canadian study permit.
- 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)
Upon maturity, the principal amount of your GIC, together with any interest earned on it during its term, will be deposited into a savings deposit or renewed or reinvested in accordance with your instructions, such transactions all to occur within your Registered Plan.
Reinvestment risk: When GICs mature, investors face the risk that they will be unable to reinvest their principal and interest at a similar rate of return as their original investment. In contrast, a fixed income ETF will remain invested in a diversified portfolio of bonds, helping to mitigate reinvestment risk.
Frequently asked questions about investing in a GIC
Typically, GICs are ideal for short-term investments, such as up to five years. However, they can also be used for longer-term (five to 10 years) investments as well if it's a better fit for your goals, especially if you're using a laddering strategy.
The years that we saw bonds outperform GICs were when interest rates remained steady or fell. Also, if a bond is held to maturity and has a higher interest rate than the GIC, it will outperform the GIC. During 2022, when interest rates rose, bondholders saw the values of their bonds fall in the secondary market.
What is the American equivalent to a GIC?
The GIC works much like a certificate of deposit in the U.S. In the case of GICs, you deposit money in the bank and earn interest on that money. The catch is, the money must be deposited for a fixed length of time, and interest rates vary according to how long that commitment is.
- 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%
Guaranteed investment certificates are sold by Canadian banks, credit unions and other financial institutions and can be insured by the Canadian Deposit Insurance Corporation (CDIC). People in the U.S. may be able to buy GICs if they have an account through a Canadian bank.
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
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.
