Yahoo Finance Ask the Expert: How (and where) to find the best GIC rates
With higher interest rates now, returns can be more than 5% at some institutions
High interest rates have made guaranteed investment certificates (GICs) an attractive investment option and experts suggest looking outside the big six banks for the best returns.
GICs are among the safest investments in the market, as the original contribution is guaranteed. For years, paltry returns made GICs unattractive options, but now, with higher interest rates, returns can be more than five per cent at some institutions.
Cindy Marques, certified financial planner and director at Open Access Ltd., told Yahoo Finance Canada one of the best ways to maximize the investment is to shop around, as the returns can vary greatly depending on the bank.
“Honestly, a quick Google search goes a long way,” she said in a recent phone interview.
As of Oct. 16, Ratehub.ca’s GIC tracker shows Oaken Financial is offering a 5.75-per-cent return for a one-year investment of $5,000, while Tangerine is offering 5.7 per cent and EQ Bank is offering 5.65 per cent.
The site shows Canada’s big six banks don’t offer the same returns, however, as CIBC, TD Bank and the Bank of Montreal are each offering 5.35 per cent interest rates.
The difference between Oaken’s return and the best rates available at the big six banks amounts to $20 for a one-year $5,000 investment.
What you need to know about GICs
GICs are attractive right now, but there are some things first-time investors should know.
For one, it’s important to understand the investment is locked in, meaning you will not have access to the money until the maturation time – or term limit – is up.
Maturation terms vary depending on the investment and desired interest rate, but can be anywhere from 30 days to 10 years. It’s for that reason that Marques suggests putting only a fraction of savings into GICs.
“You might only want to invest a portion of your investable assets because you want to provide that liquidity there just in case,” she said.
“You don't necessarily want to tie up all of your money in a GIC and then not have access to liquid funds if you need it.”
Another thing to pay attention to is when the interest is paid out, typically annually or at maturity.
“(If) interest is paid only on maturity, then that's already telling you if you cash out early, you're not going to get anything,” Marques said. “You forfeit the opportunity for any kind of growth there.”
Be aware of tax implications
The income of a GIC is taxable at the same rate as other income, so Marques suggests making GIC investments through a tax-sheltered account, such as a tax-free savings account or registered retirement savings plan.
Marques adds that if the interest is compounded on GICs with maturation times longer than a year, you could end up paying taxes on interest that you don’t yet have access to.
“If it's compounded annually, and this is invested in a non-registered account, you're going to receive tax slips for the interest that's been accrued, even though it hasn't been paid out,” she said.
“You'll be paying taxes on money that you haven't actually received yet.”
Ben Cousins is a freelance journalist based in Toronto. Follow him on Twitter @cousins_ben.
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