With plenty of question marks still surrounding the economy for the foreseeable future, many investors with short time horizons are now understandably searching for safer investment options. For anyone looking for a dependable—but also competitive—return on investment, guaranteed investment certificates (GICs) from a digital bank could be the answer.
What is a GIC?
When you buy a GIC, you lend an agreed-upon amount of money to a financial institution for a set period—anything from one month to 10 years. In return, you’re paid a fixed rate of interest on that money, typically on a monthly, semi-annual or annual basis.
Interest rates vary depending on the length of the GIC’s term, as well as the type of financial institution. Generally speaking, the longer the term of the GIC, the higher the interest rate. In addition, you can often find higher GIC rates at virtual and online banks, such as EQ Bank, because they have lower overhead costs than traditional brick-and-mortar banks and pass along those savings to their customers in the form of more competitive rates.
The interest earned on a GIC is guaranteed only if you hold the GIC until the end of its term, also known as the maturity date.
Why invest in a GIC from an online bank?
- Low risk: The interest you earn on a GIC is guaranteed, unless you cash it out early (more details on redeemable and non-redeemable GICs below).
- Flexibility: Digital banks offer a wide range of GIC options nowadays, so there’s sure to be one that fits your specific savings goal. GICs are an excellent option for short-term goals, as the guaranteed interest rate eliminates the risk of the market’s short-term uncertainty. Planning to retire in 10 years? GICs can also be an option for mid- to long-term savings goals where risk reduction is top of mind.
- Eligible for RRSPs and TFSAs: GICs are eligible to be held in both non-registered accounts and registered accounts, including registered retirement savings plans (RRSPs) and tax-free savings account (TFSAs), which can help reduce your taxable income come tax time.
- Hedging against volatility: GICs can help offset risk in an investment portfolio, which is especially important in today’s volatile market conditions.
- Guaranteed means guaranteed: In the rare event that your financial institution closes or goes bankrupt, your GIC investment is eligible for Canada Deposit Insurance Corporation (CDIC) protection. The CDIC is a federal Crown corporation with the goal of contributing to the stability of the financial system in Canada.
- Easy to start: Most banks require very low minimum deposits. At EQ Bank, for example, you can start investing in GICs with as little as $100.
Redeemable vs. non-redeemable GICs
When you buy a GIC, you can choose from redeemable and non-redeemable options. Here are the differences:
- Redeemable GICs can be cashed in before their maturity date, but they typically offer lower interest rates and/or the financial institution may charge you a penalty for early redemption.
- Non-redeemable GICs are less flexible, but pay out with higher rates. You can make a request to cash them in, but it’s up to the financial institution whether to allow it or not. If it does—typically only in cases of extreme financial hardship—it may charge you a penalty. (At EQ Bank, all GICs are non-redeemable.)
Before investing in a non-redeemable GIC, consider these potential risks:
- If you need access to your funds but aren’t allowed to cash in the GIC early, you may need to borrow money instead, at a higher cost than what you’re earning on the GIC.
- If interest rates rise, you may lose an opportunity to earn more interest elsewhere.
When shopping around for GICs, it’s useful to understand how interest rates are determined. Banks, whether online or bricks-and-mortar, don’t set their rates in isolation. Instead, they first take into consideration the current interest rate set by the Bank of Canada, called the prime rate (currently at 4.70%), and then add a premium on top of that to come up with the appropriate GIC rate.
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