GICs: What you need to know

James Rodriguez James Rodriguez  updated on 2022-03-07

Interest rates are nearing all-time lows; traditional investment options such as government bonds and savings accounts are simply failing to provide Canadian investors with the returns they want. Did you know GICs may offer a route out of this investment problem?

This HelloSafe guide will walk you through what they are, how they work, their pros and cons and everything else you may need to know.

What is a GIC?

GIC stands for guaranteed investment certificate. This is a type of deposit investment sold to individuals in Canada by Canadian banks and trust companies. 

They are a resourceful investment option, coming in a variety of different forms that suit a broad range of financial needs. It is common for many investors to purchase guaranteed investment certificates for the purposes of retirement plans. This is due to how they offer a low-risk fixed rate of return and are – up until a certain point – protected by the Canadian government.

How do GICs work?

When a client purchases a guaranteed investment certificate, they are essentially depositing their money in the bank and receiving interest payments in return for said deposit. However, it is required that the money be deposited for a set time period and the rates of interest are determined in line with the length of this period. The longer the investment is deposited with the bank, the higher the interest payments that are received.

The risk associated with guaranteed investment certificates is low because there is a legal obligation on the part of the financial institutions to reimburse the original investment sum and any interest earned. The Canadian Deposit Insurance Corporation (CDIC) makes sure that even in the event of the bank’s failure, the investor is insured for up to 100,000 Canadian dollars. 

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What is a non-redeemable GIC?

The appeal of non-redeemable GICs is that they provide investors with higher rates of interest, however, they compromise on the flexibility of redemption terms. When purchasing a non-redeemable GIC, investors are required to agree upon a fixed length of time during which their money will remain deposited with the bank. 

The investor has the freedom to make a decision regarding how long their time commitment is, with a range of terms available from 3 months to 10 years. The conditions of paying off this type of guaranteed investment certificate are usually quite strict; investors are not permitted to withdraw money before the maturing of their investment. They will be obligated to pay a financial penalty if there is a need for the early withdrawal of funds.

What is a cashable GIC?

When purchasing cashable GICs, investors have the capacity to withdraw their deposit - following an initial closed time period - without suffering the inconvenience of being required to pay a penalty fee. 

For instance, funds may be deposited with a bank for a term of two years. However, it will be optionable for the investors to withdraw these funds before the GICs maturity date without incurring a financial penalty. Although, this is provided that a preliminary fifty-day period (during which withdrawal is prohibited) has passed.

How is interest calculated on GICs?

With GICs, rates of interest are calculated along with the length of the time period during which the money is deposited with the bank. Longer terms will result in the offering of higher interest rates.

For instance, if you purchase a guaranteed investment certificate for $4,000 at a 2% interest rate, in 10 years it will be worth $4,875.98. You will earn $875.98 interest.  

What is the best interest rate for a GIC in Canada?

GIC rates are subject to constant unsteadiness. Rates change on the length of the term which the investor commits to – with longer terms providing higher rates of interest. Whether the GIC is non-redeemable or cashable can also exercise a degree of influence on interest rates: cashable GICs generally offer lower interest rates as different to their non-redeemable counterparts due to the increased flexibility of their redemption terms. 

Here is a ranked selection of GIC rates on offer to investors, as of March 2022, from various Canadian financial institutions.

1-year terms

ProviderGIC rate (%)
Oaken Financial 2.15
Meridian Credit Union2.00
Bridgewater Bank1.97
TD Bank1.05
1 year term CIG interest rates

3-year terms

ProviderGIC rate (%)
EQ Bank2.80
Shinhan Bank Canada2.64
Tangerine2.35
CIBC2.25
3 year term CIG interest rates

5-year terms

ProviderGIC rate (%)
Wealth One Canada3.0
Scotiabank3.0
Peoples Trust2.8
RBC 2.25
BMO 1.95
5 year term CIG interest rates

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What is the penalty for withdrawing a GIC early?

Regarding cashable GICs, investors are permitted to withdraw funds early following an initial closed period and will receive interest payments at a reduced rate – which usually depends upon how far into the term that the investment was held. The rates for premature redemption will be subject to disclosure when the purchase of the GIC is made.

In terms of non-redeemable GICs, investors are bound by contract to hold the investment up until the date of maturity; financial institutions are not burdened by any obligation to permit early withdrawal. If the financial institution agrees to break the contract, the investor will likely be charged a penalty fee and may also be denied some or all of the interest payments.

What happens when a GIC reaches maturity?

When a GIC reaches its date of maturity, the sum of the initial deposit will be returned to the investor in accompaniment with any interest that has been accrued. The use of the funds is then at the discretion of the investor; they may be subject to encashment or reinvested elsewhere.

Pros & Cons of GICs

The extent to which GICs can be considered as advantageous or disadvantageous are dependent on the nature of your personal circumstances and what your investment goals are. Let us consider some of the major pull-factors and drawbacks for investors regarding GICs.

Pros

  • Extremely safe investment: your principal (and in most cases your interest) are insured to a degree by the Canadian government
  • Higher interest rates than regular savings accounts and government bonds
  • Minimum deposit sums are as low as $500
  • Investors are usually not required to pay a fee to open a GIC
  • Diversity of terms/features available

Cons

  • Interest rates can often be very low
  • Can lose purchasing power under inflation
  • Best GIC rates require funds to be inaccessible for lengthy periods of time
  • Early withdrawal often precipitates the incursion of a penalty fee

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What happens to a GIC if someone dies?

Premature withdrawal of GICs usually results in the charging of a penalty fee and the loss of accrued interest. However, in the event of the account owner’s death there is an exception to this rule.

The funds will not be subject to probate – they will be transferred to a named beneficiary who may withdraw them immediately for free. Alternatively, the money could be placed directly into another GIC with more attractive rates. In essence, guaranteed investment certificates will be handled as if redemption had been granted at the date of death.

GICs vs Mutual Funds

GICs and mutual funds are forms of investment products in Canada, that vary in terms of the degree of risk that they carry. GICs are considered an extremely safe and secure investment: the principal is guaranteed, and they are insured – to an extent - by the Canadian government. Mutual funds on the other hand are regarded as higher risk, however, they provide investors with more lucrative rates of return – subject to the performance of the stock market.

Mutual Funds: Pros & Cons

Pros

  • Flexibility. Encashment of funds is permitted at any time without the investor being required to pay a penalty.
  • Industry know-how. The expertise of fund managers ensures that investments are handled in a manner that yields the highest rates of return.
  • Saves time. Investors need not delegate time for the purposes of monitoring their investment because this responsibility is taken care of by fund managers.

Cons

  • Lack of control. Investors are not able to directly manage their investments – this responsibility is handed over to fund managers.
  • Transaction fees. Investors will be required to pay an overhead cost for the management of their funds.
  • Dictated by stock market performance. A downturn in the stock market would negatively impact returns.

GICs: Pros & Cons

Pros

  • Flexibility. Encashment of funds is permitted at any time without the investor being required to pay a penalty.
  • Industry know-how. The expertise of fund managers ensures that investments are handled in a manner that yields the highest rates of return.
  • Saves time. Investors need not delegate time for the purposes of monitoring their investment because this responsibility is taken care of by fund managers. 

Cons

  • Lack of control. Investors are not able to directly manage their investments – this responsibility is handed over to fund managers.
  • Transaction fees. Investors will be required to pay an overhead cost for the management of their funds.
  • Dictated by stock market performance. A downturn in the stock market would negatively impact returns.
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