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Guaranteed investment certificates, or GICs, are a popular type of investment because they offer an ensured rate of return and there’s no risk of losing money.
They can be especially attractive when interest rates rise or recession is on the horizon.
By utilizing a technique known as a GIC ladder, you can maximize your investment while minimizing one of the GIC’s few downsides: the inability to access your money for prolonged periods of time.
How GIC ladders work
GIC laddering is an investment technique that allows you to take advantage of the higher interest rates offered for long-term GICs without locking away all your money at the same time.
So, how does a GIC ladder work? Let’s take a look at an example in which you have $25,000 to invest.
Rather than taking the money you want to invest and using it all to buy one five-year GIC, you’d divide it into $5,000 increments and purchase several separate GICs, each with a different term, ranging from one to five years. GICs are available at many traditional financial institutions like banks and credit unions, as well as online-only banks.
Using this strategy means one of your GICs will mature every 12 months. You could roll it over and reinvest for a new five-year term, or if you need the cash, you can reclaim the first $5,000 (plus interest) after a year without paying an early-withdrawal penalty.
Staggering the maturity dates of your GICs yields a win-win-win: guaranteed returns, reasonable access to your money and reduced exposure to the impact of changing interest rates.
How to build a GIC ladder
Step 1: Divide your money and buy five GICs
Continuing our previous example, let’s say you have $25,000 to invest in GICs.
Rather than investing that entire sum into one five-year GIC, you opt to build a GIC ladder by investing $5,000 into each of several GICs with different terms: a one-year GIC, a two-year GIC, a three-year GIC, a four-year GIC, and a five-year GIC.
To demonstrate the benefits of a GIC ladder, imagine your new GICs have the following interest rates:
- One-year: 4.50%
- Two-year: 4.75%
- Three-year: 5.00%
- Four-year: 5.10%
- Five-year: 5.20%
When you add up these interest rates (they total 24.55%) and divide by the total number of investments you made (five), you get your average annual return for the first year (4.91%).
On its own, the one-year GIC in our example would earn 4.50%, which means the laddering strategy will put you 0.41% ahead.
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Step 2: When your GICs mature, reinvest them
After one year, your first GIC will mature. In this example, your $5,000 investment will have earned 4.75%, for a total of $5,237.50 at maturity.
At this point, you can reinvest that $5,237.50 into a five-year GIC, knocking out the 1-year term rung from your ladder and increasing your average return rate.
Assuming the rates in the example stay the same, your total interest will now be 25.25% (4.75% + 5.0% + 5.1% + 5.2% + 5.2%).
Divide that 11% by your five investments and the average return for your second year is now 5.05%.
You are now 0.14% ahead of where you would be if you had just invested all your money in a one-year GIC and rolled it over a second time.
Step 3: Repeat the process
As each GIC matures, you have the option to reinvest the funds into five-year GICs. Because you staggered the initial terms, one GIC will continue to mature each year.
Let’s say that interest rates stay the same over the course of the five years. That means at the beginning of year six, all of your investments will be in five-year term GICs with rates of 5.2%. Again, divide the total interest rate (26%) by the number of investments (five) and you get 5.2% as your average annual return. That’s now 0.7% higher than the one-year GIC.
Laddering is meant to be a long-term strategy. You can pull out some of your money as the terms mature, but as you can see, the longer you keep reinvesting, the higher your returns.
Multiple banks offer free online GIC ladder calculators to help you figure out compound interest for GIC laddering at current rates. If you’re really keen, you can also create your own spreadsheet using these formulas.
Here’s a visual representation of a GIC ladder, showing the stepwise effect that inspired its name.
| Total investment: $25,000 | Today | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|---|
| $5,000 | Purchase 1-year GIC | GIC matures, reinvest for 5 years | ||||
| $5,000 | Purchase 2-year GIC | GIC matures, reinvest for 5 years | ||||
| $5,000 | Purchase 3-year GIC | GIC matures, reinvest for 5 years | ||||
| $5,000 | Purchase 4-year GIC | GIC matures, reinvest for 5 years | ||||
| $5,000 | Purchase 5-year GIC | GIC matures, reinvest for 5 years |
Pros and cons of laddering GICs
Pros
- Take advantage of higher interest rates offered with longer terms.
- Enjoy more liquidity, since at least one GIC will mature every year and be accessible without penalty.
- More responsive to interest rate changes. If rates increase, you can reinvest your mature GICs at a better rate. If they decrease, you can rest a little easier knowing that some of your money is already locked in at higher rates.
Cons
- GICs can struggle to keep up with inflation, even when interest rates rise dramatically, so these longer-term investments may not earn as much as you could elsewhere.
- If you purchase a variable rate or market-linked GIC, you might see lower returns when the market or interest rates dip.
Frequently asked questions about GIC ladders
The first step of GIC laddering is to buy five GICs with terms of one to five years. When each GIC matures, you reinvest your capital into a 5-year GIC to take advantage of the higher interest rates and to ensure that one of your GICs continues maturing every year.
GIC interest rates vary depending on type and the financial institution providing them, so you’ll have to compare the best GIC rates to find the one that can earn you the most on your 5-year investment.
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