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The era of fantastically low-interest rates has ended.  All hail Savers!High interest GICs

Rates are still low, but they’re no longer a gift to borrowers and a saver’s nightmare.   Savers can now find some attractive products, but should they pay much attention to high-interest savings accounts?

You can get 2.05% to 2.30% from a few players including Alterna Bank and EQ Bank, both of which are members of Canada Deposit Insurance Corp. (CDIC). But the rest of the banks are paying something in the low 1% range, which is roughly half the current level of inflation. To make matters worse, Alterna Bank and EQ Bank don’t offer High-Interest Savings accounts to corporations or make them available to RRSP and TSFA holders.

You can make sure you are getting a good deal by checking out The Canadian High-Interest Savings Bank Accounts website.  It has a chart of banks offering the best rates.

That being said, savers can now choose to purchase guaranteed investment certificates (GICs) with a one-year term which is a little like a High-interest savings account. Oaken Financial has a 2.8% one-year GIC available, and it offers CDIC protection.  It is also can be purchased under your RSP, TFSA, corporate or RIF account.  Something that cannot be done with a high-interest savings account.

Tangerine and Simplii Financial (Formerly PC Financial) both offer a disappointing rate of only 1.1% on savings accounts, but an excellent rate of 2.5% on 1-year GICs.  So, check it out if you are a client of either Tangerine and Simplii Financial.

5-year GIC rates have responded most positively to the recent government rate increases.  You can now find 5-year GIC rates are being advertised as high as 3.52%. The highest rate in 10 years.  Some believe that these rates are borne out of the generosity of banks. Nope, competition is driving these rates higher. 

Ever since Home Capital had its run-in with the OSC which resulted in a “Bank Run”, banks have been very cautious about relying on High-Interest Savings accounts.  During the bank run, Home Capital saw their High-Interest Savings accounts almost drained by $2 billion.  That is very scary for any Bank.  But, Home Capital’s GIC holders stayed strong (mostly because the GICs were non-redeemable).  The lesson smaller Canadian Banks took from this near calamity was to move towards 5 year GICs as a source of capital.

And thus, Banks want more GIC investors than ever before and must pay more to attract them.

So maybe long-term GICs finally become a good investment choice?

According to the rate monitor website ratesupermarket.ca, you’ll currently see 5 year fixed-rate non-registered, non-cashable GICs being offered at an annual rate of between 3.00% and 3.52% at the top end of the range. At the low end, you’ll find the big banks offering a disappointing return of only 1.25%.

GICs are a type of locked-in deposit. Because the financial institution gets the use of your money for the specified term, it will offer a higher rate than you’d get with an entirely liquid deposit such as a savings account, a money market fund, or a short-term Treasury bill.

Different financial institutions offer GICs with varying lengths of term. Terms range from 90 days to as long as 10 years with the most popular term being 5 years. The annual interest rate offered remains the same for the term of the GIC, and interest may be paid monthly, quarterly, semi-annually, or annually, depending on the financial institution. But be wary, your money is locked in until maturity, and you’ll pay the penalty if you decide to cash out early.

Some of the larger financial institutions offer redeemable (that is, cashable with no penalty) GICs. However, these GICs provide a much lower rate than the non-redeemable version for the same term.

Does the Federal government fully guarantee the GIC?  Almost.  The principal amount but not the interest of a GIC investment is covered by the Canada Deposit Insurance Corp (CDIC) to a maximum of $100,000 per institution.  This makes purchasing a GIC from Oaken Financial nearly as safe as buying a GIC from RBC as long as your investment is less than $100,000.  Receiving 3.5% from Oaken Financial compared to RBC’s 1.5% is well worth the marginal extra risk.

You can expand your overall CDIC coverage by purchasing GICs within your RRSP, RIF or TFSA.  Each account gets its own $100,000 CDIC coverage.  You can also buy GICs from several different institutions and expand your coverage that way too.  Each institution provides $100,000 in coverage.

“Laddering” is a strategy to help deal with cash flow and interest rate risk is to buy GICs with staggered maturity dates. For example, you’d buy a GIC maturing in one year, another in two years, another in three, and so on. That way, you’ll have access to some of your principal every year and can decide at each maturity date whether to keep rolling into a new GIC.  It will also allow you to improve your returns as rates move up.

Money in a CDIC-protected account will not be lost in a bank failure.  CDIC, a crown corporation, says it aims to pay deposits in non-registered accounts within three business days from the date a bank fails. It has been a long time since a bank failed in Canada. Oh, and the Big 6 banks can’t fail as they were deemed too big to fail in March of 2014.  Too bad their GIC rates are 2% below the going market rates (or maybe that is why).

Find the best GIC rates available at ratesupermarket.ca.