What are GICs?
GICs are a type of term deposit investment. They’re low-risk because they provide a guaranteed return. Plus, GICs usually have attract higher interest rates than most savings accounts.
By purchasing GICs, you enter a contract with Canadian banks, credit unions, or trust companies to lock away your money for a set time period. In return, your investment earns interest at a fixed rate.
While the rates applied to GICs vary between financial institutions, investors usually get higher rates for investments with longer maturity dates.
People often purchase GICs for retirement plans as the Canadian government provides insurance to a degree.
How do GICs work?
The money you invest in a GIC will be set aside for a specific period, ranging from 30 days to 5 years. Financial institutions set a minimum investment amount for their GICs. At Meridian you can start with just $100 – the big banks are often higher.
Fixed rate GICs are the most popular option. Some GICs pay variable interest rates. Variable rate GICs can be rewarding for investors when the market rates increase, though if the financial markets experience a decrease in interest rates, you risk not getting anything in return upon maturity. But of course, you will not lose the money you initially invested.
Many GICs are non-redeemable. This means that your money is locked away for the agreed fixed period in order to get the full benefits. Early withdrawal could result in penalty fees. If a GIC is called “cashable” or “redeemable” you can access the money in it without penalty – just note that these options often come with lower interest rates.
So how do you find the best fit? Learn about the different types of GICs and their features.
Features of GICs
Terms
The length of a GIC term varies – it can range from 30 days to 5 years. The end of your GIC term is called “maturity.” If you think you’ll need access to your money soon, choose a shorter term. If you want to leave your money alone and let it earn more interest, choose a longer term (they usually offer higher interest rates). If you’re not sure when you’ll need access to your money, choose a flexible option – like a cashable GIC.
Interest rates
Different types of GICs earn fixed, variable, or escalating interest – this affects how much your initial investment will grow over the course of the term.
- GICs with fixed interest are very low-risk – with a guaranteed rate you can predict how much you’ll earn.
- GICs with variable interest have rates that may change throughout the term – you benefit from higher interest when the prime rate goes up, but you take the risk that interest rates could drop.
- GICs with escalating rates have fixed interest, but the rate goes up each year. The longer your money stays in the GIC, the more you earn.
GICs generally pay out interest annually or at maturity, though some pay it on a more frequent schedule. Usually, interest is added to the balance of the GIC so it can compound and keep earning more.
Redeeming your GIC
At the end of your term you can redeem (or “cash”) your GIC and access your money plus all the interest it generated. You can then use that money for a financial goal or put it in another GIC and keep earning interest.
There are different rules about accessing your money early for different types of GICs. For example, with a cashable GIC you can access your money any time without paying a penalty (though some GICs make you wait a short time, usually about 30 days, if you want to avoid a penalty).
Types of GICs
Cashable GICs
Cashable GICs usually have a 1-year term and you generally have the flexibility to cash out your GIC any time without paying a penalty. Keep in mind, though, if you cash out prior to the full term you may earn no interest or a lower interest rate. This flexibility makes cashable GICs one of the most popular options. One of the few drawbacks to cashable GICs is that they sometimes have lower interest rates than other types of GICs.
This is a great option for you if:
You want access to your money in the near future and aren’t worried about getting the highest possible interest rate.
Fixed rate GICs
Fixed rate GICs are simple – you invest your money for a set term and earn a fixed interest rate on it, paid at specified intervals or at maturity. With a simple fixed rate GIC you typically can’t access your money until maturity, not without paying a penalty.
This is a great option for you if:
You want a guarantee on how much interest your investment will earn and you’re confident you won’t need access to your money until maturity.
Escalator GICs
Escalator GICs offer fixed interest rates that increase every year. You might earn 2% for the first year and then 3% the second year, etc. The average of all the rates will equal the total yield of the interest you earn. The longer you keep your money in the GIC, the more interest you’ll earn. You also get some added flexibility – each year you get the option to convert to a different GIC.
This is a great option for you if:
You plan to keep your money in the GIC for longer than one year and you want the security of knowing how much interest you’ll earn.
Market-linked GICs
Market-linked GICs earn interest based on the performance of a stock market index or a basket of securities. These are also known as index-linked or equity-linked GICs. Your initial investment is guaranteed but the interest rate changes. When the market index or basket of securities is doing well you can earn a high rate of return, but if it doesn’t, you could earn low returns or none at all. Some market-linked GICs offer a minimum return so that even if the market doesn’t perform well, you still earn some interest. These GICs typically have terms from 1 to 5 years and require you to pay a penalty if you access to your money before maturity.
This is a great option for you if:
You’re happy to accept a little risk if it means you could get a higher return in the long run and you aren’t going to need early access to your money.
Learn more about market-linked GICs
Variable rate GICs
Variable rate GICs are available from some financial institutions, but they’re typically less popular. A variable rate GIC earns interest based on the prime rate, which varies. There’s more risk involved than with other types of GICs – you might earn a lot, you might earn nothing.
This is a great option for you if:
You’re happy to accept a little risk if it means you might get higher returns in the long run.
What’s the difference between registered and non-registered GICs?
Registered GICs
You can hold GICs in your registered accounts, like TFSAs, RRSPs, and RRIFs. Like other registered investments, you don’t pay tax on your earnings until withdrawal (with a TFSA you don’t pay tax even then). Your money grows tax-free and you can still get the benefits of various GICs – like guaranteed interest, escalating rates, or the option to cash out every year. One thing to remember – the contribution rules of these registered accounts still apply.
Non-registered GICs
Non-registered GICs aren’t sheltered from taxes – you pay taxes on the income generated by the account each year. On the plus side, you aren’t limited by any contribution rules, so a non-registered GIC can be a great place to invest your money if you’ve already reached the maximum limits set by accounts like your RRSP and TFSA.
Get the most out of GICs
Use GICs to build your investment portfolio
Some people wonder why they should bother with GICs – the interest doesn’t seem like much compared to the potential returns of investing in something like stocks. Also, since GICs are a low-risk option, people sometimes assume that they’re only good for investors with low risk tolerance.
GICs are good for everyone. The interest rates may not seem like much, but they’re guaranteed – something that can’t be said for the stock market. Plus, the longer you keep your money in GICs, the more guaranteed interest you’ll earn. As for risk tolerance, if you’re interested in pursuing higher risk investments, GICs can balance out the overall risk to your portfolio.
Maximize your returns by laddering GICs
One of the ways you can get the most out of GICs is by laddering – you divide your investment into different GICs instead of locking in to one long-term investment.
Here’s how it works: Divide your initial investment by five. Invest each of those smaller amounts in separate GIC terms: 1-year, 2-year, 3-year, 4-year, 5-year. Then, when each term matures, you can access some of the money if you need it or reinvest in a GIC with a 5-year term. As long as you follow this pattern, you’ll have a GIC that matures every year and your overall annual return will likely be much higher than if you were investing in GICs that mature at the same time.
This gives you flexibility, security, and higher returns.
Invest with Meridian GICs
Meridian is a leader when it comes to the GICs we offer. Not only do we have highly competitive interest rates, we’ve got some of the best options on the market and you only need to deposit $100 to get started.
Our innovative Raise the Rate GIC is one of the first of its kind in Canada. It allows you to rate match comparable Meridian GICs, increasing the interest you earn and giving you control over your investments. Available in 3- and 5-year terms. Learn more about Raise the Rate.
You can also check out one of our great options for short-term savings: 1-year Cashable GIC with a guaranteed rate of 2.75% – one of the highest on the market! Learn more about the 1-year Cashable GIC.