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Understanding GICs

What is a GIC anyway?

A GIC (Guaranteed Investment Certificate) is a safe, low-risk investment that pays you a guaranteed rate of return over a specific period. When you buy a GIC, you’re really lending the bank money, and the bank pays you interest in return. It’s a bit like a savings account, but with some parameters.

The duration of a GIC investment (usually called “the term”) varies, as does the interest rate. It depends on the type of GIC and how long you’re willing to invest your money.

GIC features

Terms

The length of a GIC term varies – anywhere from 30 days to 5 years. The end of your GIC term is called “maturity” or the “maturity date.” When you buy a GIC, you need to decide when you’ll need access to your money; this is because the money that you invest will be locked in for the duration of the term. If you’ll need it soon, choose a shorter term. If you can leave the money alone for a while, choose a longer term. A longer term usually offers a higher interest rate.
 

Interest rates

Different types of GICs earn fixed, variable, or escalating interest – this affects how much your initial investment (or your “principal”) will grow over the term.
  • GICs with fixed interest are super low-risk – you get a guaranteed rate, and you can predict how much you’ll earn.
  • GICs with variable interest have rates that could change anytime. A variable rate GIC is tied to the Prime rate – so you benefit from higher interest when Prime goes up, but you take the risk that interest rates could drop. motusbank doesn’t currently offer variable rate GICs.
  • GICs with escalating rates have fixed interest, but the rate goes up each year. The longer your money stays in the GIC, the more you earn.
GICs generally pay out interest annually or at maturity, though some pay it on a different schedule. Usually, interest is added to the balance of the GIC so it can compound and keep earning more. Compounding is great because the interest is added to your principal, and then that amount earns interest as well. Interest on interest.
 

Renewals

At the end of your term, you can either renew your GIC plus the interest earned or ask for the funds to be paid out to your bank account.

As your maturity date approaches, we’ll contact you about getting your renewal instructions. You can also set up renewal instructions online. If we don’t hear from you, we’ll automatically renew your GIC into the same term at the prevailing interest rate.
 

CDIC Insurance

As a federally regulated institution, motusbank is a member of the Canada Deposit Insurance Corporation (CDIC). This means that eligible deposits, including GICs, are insured up to $100,000.

To get more information on deposit insurance and coverage visit the CDIC.
 

motusbank GIC types

Fixed rate GICs

Fixed rate GICs are simple – you invest your money for a set term and earn a fixed interest rate on it, paid at specified intervals or at maturity. With a simple fixed rate GIC you typically can’t access your money until maturity, not without paying a penalty.

A great option if: You want a guarantee on how much interest your investment will earn, and you won’t need the money until maturity.
 

Escalator GICs

Escalator GICs offer fixed interest rates that increase every year. You might earn 1% for the first year and then 2% the second year, etc. The average of all the rates will equal what’s called the “total yield” of the interest you earn. The longer you keep your money in the GIC, the more interest you’ll earn. You also get some flexibility – each year you get the option to convert to a different GIC.

A great option if: You want to keep your money in the GIC for longer than one year and you want the security of knowing how much interest you’ll earn.

Explore motusbank GICs
 

Registered vs non-registered GICs

Registered GICs

You can hold GICs in a registered account, like a TFSA or an RRSP. Like other registered investments, you don’t pay tax on your earnings until withdrawal (with a TFSA you don’t pay tax even then). Your money grows tax-free and you can still get the benefits of various GICs – like guaranteed interest or escalating rates. One thing to remember – the contribution rules of these registered accounts still apply.

The Government of Canada has some helpful information on different types of registered plans
 

Non-registered GICs

Non-registered GICs aren’t sheltered from taxes – you pay taxes on the income generated by the account each year. On the plus side, you aren’t limited by any contribution rules, so a non-registered GIC can be a great place to invest your money if you’ve already reached the maximum limits set by accounts like your RRSP and TFSA.
 

GIC investing tips

Build a portfolio

Some people wonder why they should bother with GICs – the interest doesn’t seem like much compared to the potential returns of investing in something like stocks. Also, since GICs are a low-risk option, people sometimes assume that they’re only good for investors with low risk tolerance.

GICs are good for everyone. The interest rates may be low, but they’re guaranteed – something that can’t be said for the stock market. Plus, the longer you keep your money in GICs, the more guaranteed interest you’ll earn. As for risk tolerance, if you’re interested in pursuing higher risk investments, GICs can balance out the overall risk to your portfolio.
 

Use a laddering strategy

One way to get more out of GICs is by laddering – you divide your investment into smaller, different GICs instead of locking in to one long-term investment. This is even easier with motusbank because the minimum investment amount for GICs is only $100.

Here’s how it works: Divide your initial investment by five. Invest each of those smaller amounts in separate GIC terms: 1-year, 2-year, 3-year, 4-year, 5-year. Then, when each term matures, you can access some of the money if you need it or reinvest in a GIC with a 5-year term. As long as you follow this pattern, you’ll have a GIC that matures every year and your overall annual return will likely be much higher than if you were investing in GICs that mature at the same time.

This gives you flexibility, security, and higher returns.

Explore motusbank GICs