For those willing to lock away their money, GICs provide a safe way to earn high returns. But it pays to shop around.Getty Images/iStockphoto
Many Canadians are frustrated by the low interest paid on traditional savings accounts, and with good reason. But for those willing to lock in their money, guaranteed investment certificates are a safe way to earn higher returns, with some rates now exceeding the Bank of Canada’s policy interest rate.
GICs are considered low-risk. Most are insured up to $100,000 by the CDIC, while GICs at credit unions may be covered beyond that.
Non-redeemable GICs, which require that you leave your funds in the GIC for the whole term you committed to, generally offer the best rates. Redeemable options exist but yield less, often comparable to high-interest savings accounts.
When considering safe fixed-income options, the main choices are savings accounts, GICs and bonds. GICs stand out for offering predictable, insured returns without market volatility.
Terms vary, but six-month, one-year and five-year GICs are the most common. They can also be held in registered accounts such as tax-free savings accounts and registered retirement savings plans, offering tax advantages.
At WOWA Data Labs, we track GIC rates from more than 30 financial institutions across Canada. Over the past 16 months, we compared the best available one-year and five-year GIC rates with top GIC offerings from the Big Six banks.
For one-year GICs – the most popular term – the best market rate is, on average, about 0.75 percentage points higher than the best offering by Big Six banks. The same pattern holds for five-year GICs, where the market leaders continue to outpace the Big Six.
We also compared the highest GIC rates with the lowest mortgage rates for similar terms and found that, in most cases, the mortgage rate was actually higher than the best available GIC rate.
These findings highlight two key takeaways. First, it pays to shop around. Smaller institutions offer GIC rates up to one percentage point higher than the best available from the Big Six banks.
This aligns with the results of a recent survey we conducted among 459 GIC holders at the Big Five banks (excluding National Bank), where 51 per cent said the rates offered were not competitive.
Second, if you have a mortgage, it may be more financially prudent to focus on paying it down rather than investing in GICs. When mortgage rates exceed GIC returns, making prepayments can provide better long-term value.
This is supported by a WOWA survey of 1,529 GIC product seekers, in which 82 per cent reported not having a mortgage – suggesting that GICs are more appealing to those who are mortgage-free.
The bottom line: GICs remain a convenient low-risk option, but sticking with a major bank or overlooking your mortgage prepayment privilege could mean missing out on better financial outcomes.
Hanif Bayat, PhD, is the chief executive officer and founder of WOWA.ca, a Canadian personal finance platform.
