Investing in GICs? Here’s why to buy them from an online bank

While many question marks still surround the economy for the foreseeable future, many short-term investors are now rightly looking for safer investment options. For anyone looking for a reliable, yet competitive return on investment, guaranteed investment certificates (GICs) from a digital bank could be the answer.

What is a GIC?

When you buy a GIC, you lend an agreed sum of money to a financial institution for a specified period, ranging from one month to 10 years. In return, you receive a fixed interest rate on this money, usually on a monthly, semi-annual or annual basis.

Interest rates vary depending on the term of the GIC, as well as the type of financial institution. Generally, the longer the term of the GIC, the higher the interest rate. Additionally, you can often find higher GIC rates at virtual and online banks, such as Equalization Bankas they have lower overhead costs than traditional physical banks and pass these savings on to their customers in the form of more competitive rates.

Interest earned on a GIC is only guaranteed if you hold the GIC until the end of its term, also known as the maturity date.

Why invest in a GIC from an online bank?

  • Low risk: The interest you earn on a GIC is guaranteed, unless you redeem it sooner (more on redeemable and non-redeemable GICs below).
  • Flexibility: Digital banks today offer a wide range of GIC options, so there’s sure to be one that fits your specific savings goal. GICs are a great option for short-term goals because the guaranteed interest rate eliminates the risk of short-term market uncertainty. Do you plan to retire in 10 years? GICs can also be an option for medium to long-term savings goals where risk reduction is a priority.
  • Eligible for RRSP and TFSA: GICs can be held in non-registered and registered accounts, including Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), which can help reduce your income taxable at tax time.
  • Hedging against volatility: GICs can help offset risk in an investment portfolio, which is especially important in today’s volatile market conditions.
  • Guaranteed means guaranteed: In the rare event that your financial institution closes or goes bankrupt, your GIC investment is eligible for Canada Deposit Insurance Corporation (CDIC) protection. CDIC is a federal Crown corporation whose objective is to contribute to the stability of the financial system in Canada.
  • Easy to start: Most banks require very low minimum deposits. At EQ Bank, for example, you can start investing in GICs with as little as $100.

Redeemable and non-redeemable GICs

When you buy a GIC, you can choose from redeemable and non-redeemable options. Here are the differences:

  • Redeemable GICs can be cashed in before their due date, but they usually offer lower interest rates and/or the financial institution may charge you a penalty for early repayment.
  • Non-redeemable GICs are less flexible, but pay with higher rates. You can make a request to cash them, but it is up to the financial institution to authorize it or not. If so, usually only in cases of extreme financial hardship, he may charge you a penalty. (At EQ Bank, all GICs are non-redeemable.)

Before investing in a non-redeemable GIC, consider the following potential risks:

  • If you need access to your funds, but are not allowed to cash out the GIC sooner, you may need to borrow money instead, at a cost higher than what you earn on the GC.
  • If interest rates rise, you may lose an opportunity to earn more interest elsewhere.

When shopping for GICs, it helps to understand how interest rates are determined. Banks, whether online or physical, do not set their rates in isolation. Instead, they first consider the current interest rate set by the Bank of Canada, called the prime rate (currently at 4.70%), then add an extra premium to find the GIC rate. appropriate.

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David A. Albanese