When to use GIC

GIC is so popular these days because 1-year GIC annual interest rate is 5% or more which we haven’t seen for a while. When the stock and bond market is so volatile, it can be a quite attractive option.

Here is what Motive Financial GIC rates by term. Very interestingly, the longer the term, the lower the rate. The highest is the one-year GIC. Lowest is the 5-year term. It started to rise again from 6-year term. That means the economists predict the interest rate is going to decline in the next 5 years.

I can’t help but wonder who would buy the 2-year, 3-year, 4-year and 5-year term GIC at this moment since they pay less interest than the 1-year GIC.

GIC can be cashable and non-cashable. It is also called redeemable or non-redeemable.  It is important to know the difference and terms of your financial institution. See here for more details. For example, it might not be suitable to put emergency fund in non-cashable GIC. It might be OK to put savings for a downpayment in non-cashable GIC if you know when you will save enough to buy a house. It usually takes a few years to save for a downpayment. This timeline is too short to invest in stocks or bonds because short-term performance is very hard to predict.  First time home buyer can combine the benefit of GIC and FHSA – First Home Savings Account.

Also, It might be a good idea to use GIC in RESP if the parents are late and only have a few years left before the child goes to college.

Don’t assume GIC has no risk. Its risk is usually the fact that its interest rate is low than inflation. The money is still losing value in that case.

To sum up, GIC is good for short investment horizon and especially when the interest rate is historically high. 😊 Make sure to pick the right type of GIC to suit our needs. Also, make sure it is CDIC – Canadian Deposit Insurance Corporation insured. There is an insurance limit of $100K. Please spread your savings among different banks if you have more than that.

Published by Worthfy

Financial literacy and counselling

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