High inflation is stressful for Canadians who are trying to make the most of their money.
To combat inflation, the Bank of Canada has raised interest rates several times, and increases are expected to continue. Though it makes borrowing more expensive, one silver-lining of rising rates is a better return on savings accounts and certain types of investments, like guaranteed investment certificates, or GICs.
If you’re seeking safe harbour for your money in an uncertain economy, here are some reasons to consider investing in a GIC.
3 reasons to consider GICs right now
1. Rising interest rates
Years of low interest rates have meant negligent growth for GIC investors. But now, as rates continue to rise, financial institutions are offering more competitive GIC rates to attract new buyers. Current rates for a one-year, non-registered GIC exceed 4% at some financial institutions. Those are attractive returns for a safe, fixed-rate investment.
2. Low risk
The pandemic, supply chain shortages, the war in Ukraine and a volatile job market; these are just some of the issues leading to an uncertain global economy.
When things get unpredictable, low-risk investments become even more appealing. Unlike other types of investments, like stocks or mutual funds, GICs are low risk because your initial principal is 100% protected.
3. Guaranteed return on investment (usually)
Another perk of GICs is that they feature fixed interest rates. Fixed rates provide certainty around how much you’ll earn, unlike the variable rates offered by most savings accounts and investment products. This predictability makes GICs ideal for risk-averse investors who like the security of knowing exactly what they’ll get at the end of the term.
The one exception to the fixed-rate rule is a market-linked GIC. Unlike a “regular” GIC, where your interest rate is guaranteed for a set term, a market-linked GIC ties your earnings to the performance of a specific market, like the S&P/TSX 60 Index.
Your principal is still protected with a market-linked GIC, but you have the potential to earn more (or less) depending on how the market performs.
Best GIC & Term Deposit Rates in Canada
Compare all different GIC rates side-by-side and find out the best rate that will meet your need
How to get the most out of your GIC
Purchasing a GIC is fairly simple — even for beginner investors — and these tips will help you make the most of it.
It’s fine to buy a GIC from the same bank where you keep your savings and checking accounts, but know that the Big Six banks don’t typically offer the best interest rates. Canada has an increasingly competitive landscape of online-only financial institutions that tend to have much better GIC rates, so make sure you compare a few options.
Consider registered accounts
If you haven’t yet maxed out your registered retirement savings plan or tax-free savings account, consider holding a GIC in one or both. This way, your interest income will be tax sheltered.
The GIC ladder strategy requires you to purchase several GICs with different maturity dates. By staggering your GIC terms, you can maximize returns without having to lock in all your funds for the long term.
For example, say you have a total of $5,000 to invest. Rather than investing the full amount in a single GIC that comes due in five years, you could instead invest $1,000 each in five GICs with terms of one, two, three, four, and five years. When each GIC matures, you can either cash it in or reinvest the funds, depending on your financial situation at the time.
Yes, rising rates have negative effects, particularly when it comes to borrowing money. But higher rates can also mean lower prices, faster savings growth and better returns on fixed-rate investments.
Online banks typically charge lower fees and deliver better interest rates on savings than traditional brick-and-mortar financial institutions, but may lack certain products and services.