When Is a GIC Investment Worth Your Money?

With interest rates more elevated than years past, GICs provide the ability to earn a decent return over a relatively short period of time — one to five years — without the risk of losing money.

Here’s what to know about how GICs work, what to consider before buying a GIC, and how to decide if GICs are the right investment option for you.

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What is a GIC?

A GIC is a guaranteed investment certificate. They’re considered one of the safest investment options for Canadians because returns are guaranteed, so there is minimal risk involved.

A GIC works similarly to a high-interest savings account, except that your money is locked in to grow for a predetermined period of time. When the investment matures, or reaches the end of that time period, you get your money back plus the agreed-upon amount of interest.

As long as you let your GIC mature, you are guaranteed that money. However, if you withdraw the funds earlier than the contract allows, you will be penalized and may lose some or all of the interest.

Nerdy Tip: Some GICs are cashable or redeemable, but they typically come with a lower interest rate. Also, if you do need to withdraw your funds, you could end up paying a penalty.

When to invest in a GIC

GICs are a great option for a few different circumstances. Here’s when investing in a GIC may be beneficial to you.

If interest rates are rising. The Bank of Canada increased the policy interest rate three times so far in 2023, in an effort to curb inflation. While rising rates make it more expensive to borrow money, they also make it more lucrative to save money via products like high-interest savings accounts and GICs.

If you struggle to save. If you have trouble tucking money away in a savings account you can access, a GIC could be helpful. Since most GICs have penalties for early withdrawal, investing in one removes the temptation to withdraw the money for an impulse purchase.

If you’re saving for a specific short-term goal. If you’re planning a dream vacation, a wedding or even a major home renovation in the next few months or years, putting your savings in a GIC is an easy way to keep that money safe and also earn a bit of interest.

If you’re retired and will need access to the money soon. GICs are much less volatile than the stock market. If you won’t have time to let a market-based investment bounce back from any potential downturns, a GIC is a lower-risk option.

If you want a balanced portfolio. GICs are considered fixed-income investments, which can help reduce risk and volatility in your investment portfolio.

If you’re intimidated by the stock market. Some people are nervous about the volatility of the stock market and choose not to invest at all. But simply holding onto cash means they miss out on growth opportunities. In this case, a GIC is a great option for investing beginners. It’s guaranteed, so your money is safe, and the interest rates are often better than those offered by high-interest savings accounts.

If you want to teach kids about investing. If you are helping your children learn about money and financing, having them put their savings into a GIC can be a great start to exploring how to invest.

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GIC investment strategies

However, GICs can be a great option for your portfolio, even if you also choose more high-risk or growth-oriented investments since they add stability. And, since interest rates have been on the rise in 2023, GICs have the potential to earn more now than in years past.

One option is to lock your money into a five-year GIC (generally, the longer the term, the higher the interest rate). When that GIC matures, you can either reinvest the money into another GIC or cash it out and use it for something else.

Another option is to buy a one-year GIC and plan to roll it over and reinvest in a new one-year GIC when it matures every year for five years. If interest rates rise each year, you could potentially earn more money. However, if interest rates drop by the time your GIC matures, you might regret not having locked in a better rate for a longer term.

The most popular GIC investment strategy is called laddering. When you ladder your GICs, you divide your investment into five GICs with different terms and buy one-year, two-year, three-year, four-year, and five-year GICs. When each investment matures, you reinvest it into a new five-year GIC. The GIC ladder strategy means you have access to a maturing GIC every year in case you need the cash or choose to reinvest.

» MORE: How to hold a GIC in a TFSA

How to choose a GIC

There are several types of GICs to choose from, including redeemable and cashable GICs, market-linked GICs, non-redeemable GICs, and more.

Before you choose one, you need to consider the following questions:

What is the goal for your GIC?
How long will it be until you need this money?
Can you afford to lock in your money and not be able to access it until the GIC matures?
Are you more comfortable with a fixed or variable rate?

Once you’ve thought about the answers to these questions, it will be easier to decide on the best GIC option for your goals.

» MORE: What’s the difference between registered and non-registered GICs?

The timing depends on your savings goals and how long you think you can go safely without access to the money. 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.

They can do both. GIC rates are tied to prime rates, so when a bank increases its prime rate, you will see higher GIC rates. When banks lower their prime rates, GIC rates will drop.