Choosing a GIC

There are many options to consider when you're thinking of buying a GIC. Make sure you know how long you want to invest for. And shop around to compare interest rates.

4 tips for choosing a GIC

1. Choose a term that fits with your investment goals

You can choose 6 months, 1 year, 2 years or up to 10 years.

2. Decide if you want to lock in your money

Is there a chance you will need your money early? Most GICs lock your money in for the term. You may have to pay a penalty for taking your money out early. With a redeemable or cashable GIC, there’s no penalty, but the interest rate will be lower.

3. Choose between a fixed or variable rate

Most GICs pay you a fixed interest rate for using your money for a certain amount of time. You know how much you’ll get back at the end of the termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition.

IndexIndex A benchmark or yardstick that lets you measure the performance of a stock market, part of a stock market or a single investment. Examples: S&P/TSX, S&P/TSX Canadian Bond Index.+ read full definition-linked or market-linkedMarket-linked A guaranteed investment that works a bit like a stock as well. What you make is tied to the performance of an equity investment (such as stock or a stock market index). But you will not lose money if you hold the investment until it matures.+ read full definition GICs pay varying amounts of interest, based on how well the stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or traded.+ read full definition (or a related index) is doing. You can’t predict how much interest you’ll receive when your GIC matures. If the stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition market or related index doesn’t do well, you may make less than a fixed-rate GIC – or nothing at all.

Caution

While index-linked or market-linked GICs protect your principalPrincipal The total amount of money that you invest, or the total amount of money you owe on a debt.+ read full definition investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition, there is no guarantee you will make money. If the underlying index performs poorly, you may only receive your original investment amount at the end of the term – but inflationInflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index.+ read full definition will reduce the buying power of that money.

The formulas financial institutions use to determine your final investment value may be complex, and the investment may be subject to a maximum return. For example, if a market-linked GIC advertises a maximum 9% return over a 3-year term, this really means an approximate maximum of only 3% per year (9%/3 years) – if the market performs well. These products can be complicated and can confuse investors that don’t take the time to understand them fully. Read and understand all of the information on this type of investment before making a decision.

4. Decide if you need regular income

To get regular income from GICs, you can do 1 of 2 things:

  • Buy a GIC that makes regular interest payments – For example, buy a 5-year GIC that automatically pays you interest each month.
  • Set up a GIC ladder – Buy GICs that matureMature When an investment such as a bond reaches its maturity date. On that date, you get your money back without any penalty. Any interest payments stop.+ read full definition at different times and pay interest on different dates. Example: With $5,000, you could put $1,000 into a 1-year GIC, $1,000 into a 2-year GIC and so on. That way you would have $1,000 of principal maturing every year for 5 years.
Warning

With index-linked or market-linked GICs, if the stock market or related index doesn’t do well, you may make less than a fixed-rate GIC – or nothing at all.

3 benefits of laddering your GICs

  1. More flexibility – You can set it up so you access your cash at different times.
  2. More choice – When each GIC matures, you choose if you want to reinvest it in another GIC. If you do, you can choose whatever term you want.
  3. Less risk – Interest rates go up and down. LadderingLaddering A way to invest where you spread your money across the same investment with different maturity dates. Example: With $5,000, you could put $1,000 into a 1-year GIC, $1,000 into a 2-year GIC and so on. That way you would have $1,000 of principal maturing every year for 5 years.+ read full definition can help reduce the effect of changing rates on your GIC investments.

4 quick steps to get started

  1. Choose a term that fits with your investment goals.
  2. Decide if you want to lock in your money.
  3. Choose a fixed or variable rate.
  4. Decide if you need regular payouts.

Take action

Use this calculator to see how even small amounts of money saved add up over time.

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