Shopping For GICs

My family loves GICs. As a group we’re pretty risk adverse, with my dad being the “crazy risk taker” for being heavily invested in mutual funds over the years (I think I’ve stolen that mantle from him with my real estate and leveraged dividend ventures however).

Much like mortgages, the posted GIC rates in banks are for suckers. There are some techniques for getting top dollars on your GICs, which I typically assume everyone knows, but figured a post would be useful for those who don’t.

To take a step back, GICs (Guaranteed Investment Certificates) are analogous to CDs (Certificate of Deposit) in the US. You put your money into them for a set period of time (often 3 months – 5 years), it is insured by the government (like a bank account) and you are basically guaranteed to get your principle and the stated interest rate back. Because there’s very little risk, the return is quite meager. However, there are a number of ways to boost that return:

1. Ask. Usually just by asking they’ll increase it by 0.5-0.75%. They’ll be more accommodating if you have more money (sadly, such is life). If you have a wealthier relative and use the same bank / branch as them, often you’ll also get preferential treatment (mention their name)
2. Comparison Shop. Often the newspaper or various internet sites will show the rates, if they’re insured they’re all pretty much equivalent – go with whoever offers the best rate.
3. Haggle – If you want to stick with your home bank, tell them the rate being offered elsewhere and ask them to meet (or beat) it. If they refuse, often when you actually transfer the funds they’ll back down and try to get you to cancel the transfer and reinvest with them (assuming its a sizable amount). Don’t give in:  next time they’ll be more accommodating.

If you put money in a GIC, then need it later, you CAN break it, but there’s a penalty cost involved, and given the low returns this definitely isn’t something you want to do. If you want to have more access to your money (liquidity), you can set up a GIC ladder, which is just breaking a large amount of money into separate GICs maturing at different times. If you need the money, you get access to it sooner, if you don’t you reinvest it.

E.g. say you want to invest $10,000 in a GIC for 5 years. Instead, buy 5 GICs, each for $2,000 maturing at 1 year, 2 years, 3 years, 4 years and 5 years. When the first GIC matures, if you don’t need it reinvest it for 5 years. Now the longest you’ll ever have to wait for money is 365 days (assuming you won’t need more than $2k).

Negatives for GICs include that they’re taxed heavily, and inflation takes a big (hidden) bite out of them.  Personally, I just use a high yield savings account for funds that haven’t been put into a specific investment vehicle yet, which gives me complete liquidity.  But back in the day, before these were available, GICs were a (somewhat) decent alternative.