GICs are notably protected as a result of they provide you a assured return, in contrast to different investments which have variable returns, similar to shares and bonds. And whenever you spend money on GICs at a monetary establishment that may be a member of the Canada Deposit Insurance coverage Company (CDIC), your deposits are eligible to be protected by government-backed insurance coverage as much as $100,000 per eligible account.
The low-risk nature of GICs makes them best when saving for an enormous aim with a deadline, like a down fee on a house or an enormous trip, in addition to whenever you need to shield your capital—for instance, for those who’re approaching retirement or already retired.
Lately, GIC charges have risen considerably. Let’s check out how GIC rates of interest are decided.
What impacts GIC rates of interest?Â
GIC charges are primarily affected by the Financial institution of Canada’s (BoC) coverage rate of interest (additionally known as the goal in a single day price or benchmark rate of interest) and by market competitors amongst banks to your deposits.
When the BoC raises the coverage rate of interest, banks should pay extra to borrow cash from one another. This value is handed on to shoppers within the type of larger charges for mortgages and contours of credit score, however it additionally incentivizes banks to pay larger rates of interest for deposits, together with investments in GICs.
It’s a recreation of provide and demand. The extra a financial institution wants deposits, the extra curiosity it will likely be keen to pay. This typically manifests as particular presents, the place a financial institution can pay above-market charges on a few of its GICs. This not solely creates higher alternatives for buyers however places upward stress on GIC charges as a complete.
The current development of rising charges has pushed GIC charges up considerably. Right now final yr, Scotiabank paid 0.60% curiosity on an 18-month non-redeemable GIC. Scotiabank is now providing 4.8% curiosity on the identical funding (as of March 6, 2023).
Charges are additionally affected by a GIC’s options. You may often earn larger rates of interest by committing to longer phrases, like 5 or 10 years, for instance. You may also earn extra curiosity for choosing a non-redeemable GIC, which might not be withdrawn early. Usually talking, the much less entry you must your funds earlier than the GIC’s maturity date and the extra dedicated you might be to leaving your cash within the GIC, the extra curiosity you’ll obtain.