Are you a saver? GIC accounts could be your best investment vehicle.

Posted August 2018

The era of really low-interest rates has ended. Which is actually good news for savers.

Rates are still low, but they’re no longer a gift to borrowers, or a saver’s nightmare. Savers can now find attractive products, but should they be swayed by high-interest savings accounts?

For these types of savings accounts, you can get 2.05% to 2.30% from a few lenders, including Alterna Bank and EQ Bank, both of which are members of Canada Deposit Insurance Corporation (CDIC). The majority of other banks, however, are paying in the low 1% range, which is roughly half the current level of inflation (in other words, quite low). The problem with the higher rates offered by Alterna Bank and EQ Bank is that these accounts aren't available to corporations, or for RRSP and TSFA holders.

To help make sure you're getting a good interest-rate deal for these accounts, check out The Canadian High-Interest Savings Bank Accounts website. It has a chart of banks offering the best rates, for comparison.

GICs may offer a similar, but better, savings alternative.

Aside from these 'high-interest' savings accounts, savers can now choose to purchase Guaranteed Investment Certificates (GICs) with a one-year term, which is quite similar to a high-interest savings account. For example, Oaken Financial has a 2.8% 1-year GIC available, and it offers CDIC protection. It also offers more flexibility, allowing purchases to be made under your RRSP, TFSA, corporate or RIF account.

Or, while Tangerine and Simplii Financial (Formerly PC Financial) both offer a relatively disappointing rate of only 1.1% on savings accounts, they have an excellent rate of 2.5% on 1-year GICs. So, check out their GICs if you are a client of either of these lenders.

For 5-year GICs, rates have responded positively to the recent government rate increases, with some being advertised as high as 3.52%, which is highest rate in the past 10 years. The recent competition is actually driving these rates higher.

Banks are very cautious in offering high-interest savings accounts.

Ever since Home Capital had a clash with the OSC, resulting in a 'bank run,' banks have been very cautious about their reliance on high-interest savings accounts. During this bank run, Home Capital had their accounts drained of almost $2 billion — a scary amount for any bank. But, during this same period, Home Capital’s GIC holders stayed strong (mostly because the GICs were non-redeemable). The lesson smaller Canadian banks took from this calamity was to move towards the more stable 5-year GICs as a source of capital.

Which ultimately means that banks are trying to attract more GIC investors than ever before, and therefore must pay more to attract them.

Are long-term GICs finally a good investment choice?

According to the rate monitor website,, current 5-year fixed-rate, non-registered, non-cashable GICs are 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 a more disappointing return of only 1.25% offered by the big banks.

GICs are a type of locked-in deposit. They allow the financial institution to have use of your money for the specified term, so will typically offer a higher rate than you would normally get with a more '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 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 GICs (that is, cashable with no penalty). 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 $100K 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 $100K. 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 $100K CDIC coverage. You can also buy GICs from several different institutions and expand your coverage that way, too. Each institution provides $100K in coverage.

Reduce your cash flow and interest-rate risk by 'laddering' your GICs. Laddering is a strategy of buying GICs with staggered maturity dates. For example, you would buy a GIC that matures in one year, another one 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 rolling them into a new GIC. This tactic will also allow you to improve your returns, if rates move up.

Money in a GIC account protected by CDIC will not be lost in a bank failure. CDIC, a crown corporation, states that it aims to pay deposits in non-registered accounts within three business days from the date a bank fails. While it has been a long time since a bank has failed in Canada (and the Big 6 banks were deemed too big to fail in March of 2014), this does offer peace-of-mind for this investment vehicle. Unfortunately, you may pay for the privilege, as their GIC rates are 2% below the going market rates.

Long-term GICs may be a good investment choice. At the very least, they seem more attractive than a high interest savings account.