We’ve written about Guaranteed Investment Certificates (GICs) a lot lately. I know this because before I fell asleep last night, I started thinking about the different GIC types. Afterward, I immediately thought, this is a really weird thing to think about right now. So, since my mind is fixated on the details surrounding GICs, let’s go one step further and really make sleeping a challenge tonight by covering the topic ‘How does a GIC work’, What are the different types of GICs? How many are there, anyway? What is the difference between GIC and term deposits?
What are GICs?
Although some banks call them GICs while other banks call them term deposits, they’re really just two different terms for a similar investment product. You may find that some banks arbitrarily differentiate between the two products based on the length of a term. But the underlying products are mostly the same. We’ll keep things simple and call them GICs.
What have we covered so far? First, we explained how GICs work and reminded you that planting your real money in the ground is a terrible idea. (You’re welcome!) We also broke down GIC ownership types. That allowed us to explore the differences between client name and nominee name GICs, while capturing how incredibly exciting GICs can be for both first-time and veteran investors! (Hint: they’re not very exciting—but they’re not supposed to be!) We highlighted the role of issuers, touched on how a GIC financial network works, and even captured the benefits of working with brokers and agents in the deposit industry.
If you’re all caught up on our GIC content so far, maybe you too are lying awake at night wondering, what else is there to know about GICs? For the record, I really hope you’re not doing that. If you are, though, you’re in for a treat as we navigate the different types of GICs available to Canadians:
GIC Types Based on Different Ways of Calculating Interest
There are really two primary factors behind every GIC: the term and the interest rate. Financial institutions create different GIC products suited for different types of investors by simply configuring these two elements. Some clients want to see their return on investment sooner than others, and so they prefer to have a shorter-term and an earlier maturity date. Those short term GICs often come with smaller interest rates but the promise that the client will see a return on investment within just a few short months. Other investors don’t mind leaving their deposits a little longer. The benefit to long-term GICs is that they provide investors with a higher interest rate and the promise of a higher return on investment at the end of a term when the deposit reaches maturity.
Some investors like a little risk. Some don’t.
Adjusting the interest rate is one way for financial institutions to create variation and differentiated GIC products for different investors. While any of these GICs can be short-term or long-term deposits, each one uses a different method of calculating interest between term deposit vs gic. Let’s take a look at them.
Fixed-Rate GICs
The interest rate for fixed-rate GICs is agreed upon at the start of the term and it doesn’t change. In other words, it’s fixed. The interest for fixed-rate GICs is calculated at the end of the term when the GIC reaches maturity.
Variable-Rate GICs
Variable-rate GICs are a little different and provide the opportunity for investors to earn more interest on their deposits. For variable rate GICs, interest is linked to a bank’s prime rate. This means that when the bank’s prime rate goes up, the interest rate on the GIC goes up, too.
Adjustable-Rate GICs
This is a less-common term for a variable-rate GIC. The concept is the same. With an adjustable-rate GIC, the interest rate varies with a bank’s prime rate.
Step-Rate GICs
Sometimes called an “escalator” GIC, the step-rate GICs are notorious for using stairs to express how the interest rate is calculated. Unlike a variable-rate GIC where the interest rate can rise and fall over time, the interest on a step-rate GIC is guaranteed to rise every year. It only goes up.
Market-Linked GICs
Mixing elements of traditional GICs with stock-based investments, market growth GICs, or market-linked GICs are hybrid investment products that are linked to a specific stock market index. They offer the security of GIC-based insurance eligibility, while also providing the potential for a higher return on investment based on the performance of a specific market index. The complex GIC investment types can come with other limitations that could affect an investor’s return, including participation rates and limits on maximum returns.
Registered GICs
Lets looks into what is the difference between registered and non registered gic? Registered GICs are held in government registered accounts like RRSPs, RDSPs, RESPs, and TFSAs. These GICs are not taxed and, as a result, offer a better return on investment. On the flipside, registered products are intended to be used for a specific purpose, and they come with rules and regulations that affect how investors can access their return once the investment matures.
Non-Registered GICs
GICs that are not held in registered investment products are referred to as non-registered GICs. These types of GICs are potentially taxable, but they don’t come with the same rules and regulations as registered investments, making it easier to withdraw your money after your investment matures.
Foreign Exchange GICs
GICs in non-Canadian currencies held at Canadian financial institutions are known as foreign exchange GICs. One popular option is a U.S. dollar GIC. These GICs allow investors to earn interest on foreign currency and are known to be great options for travelers or investors that sense a drop in the value of the Canadian dollar. Foreign exchange GICs are now insured by the Canada Deposit Insurance Corporation (CDIC). So, if a financial institution fails, your investment is insured.
Any of These GIC Types Can Be Non-Redeemable, Redeemable, or Cashable
One additional feature of GIC product types is that they can be either non-redeemable, redeemable, or cashable. Unless otherwise stated, GICs are typically non-redeemable. That means when investors deposit their funds into a GIC, they don’t have access to those funds until their investments mature. That’s a bit of a commitment.
Some investors prefer the added security of knowing that they can withdraw their money early if they need it. That’s what cashable and redeemable GICs are for. Cashable and redeemable GICs allow investors access to their money in the event of an emergency. In exchange for this extra security, these GICs typically come with additional terms like early redemption fees and redemption rates. The details between cashable and redeemable can get a bit cloudy, and the two terms are sometimes used synonymously—but there is a difference.
There’s a lot of options when it comes to GICs, and it can be hard to remember the details between them. You can reinforce your understanding of GIC types by imagining when you would want to choose one option over another. Ask yourself, when would you want to choose a foreign exchange GIC over one in domestic currency? Or what’s the difference between a variable rate and a stepped-rate GIC? These are perfect questions to help you remember the difference between GIC types.
Learn more About Types Of GIC’s Here:
Sources:
https://www.ratehub.ca/gics/market-linked-gic
https://www.ratehub.ca/blog/cashable-vs-redeemable-gics/
https://www.investopedia.com/terms/t/termdeposit.asp
https://www.canada.ca/en/financial-consumer-agency/services/financial-toolkit/saving/saving-2/3.html
As a seasoned financial expert with a deep understanding of investment products, including Guaranteed Investment Certificates (GICs), let's delve into the key concepts covered in the provided article and elaborate on each of them.
Types of GICs:
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Fixed-Rate GICs:
- The interest rate is predetermined at the beginning of the term and remains constant.
- Interest is calculated and paid out at the end of the term when the GIC matures.
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Variable-Rate GICs (or Adjustable-Rate GICs):
- The interest rate is tied to the bank's prime rate.
- As the prime rate fluctuates, so does the interest rate on the GIC.
- Alternatively referred to as "adjustable-rate GICs."
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Step-Rate GICs:
- Also known as "escalator" GICs.
- The interest rate on step-rate GICs is guaranteed to increase every year, providing a predictable pattern of growth.
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Market-Linked GICs:
- Hybrid investment products combining features of traditional GICs with stock-based investments.
- Linked to the performance of a specific stock market index.
- Offers the security of GIC-based insurance eligibility along with potential higher returns based on market performance.
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Registered GICs:
- Held in government registered accounts such as RRSPs, RDSPs, RESPs, and TFSAs.
- Not taxed, offering a better return on investment.
- Subject to rules and regulations associated with registered accounts.
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Non-Registered GICs:
- Not held in registered investment products.
- Potentially taxable, but less restrictive in terms of rules and regulations compared to registered investments.
- Easier withdrawal process after the investment matures.
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Foreign Exchange GICs:
- GICs in non-Canadian currencies held at Canadian financial institutions.
- Examples include U.S. dollar GICs.
- Provide an opportunity to earn interest on foreign currency and can act as a hedge against currency fluctuations.
Redeemability of GICs:
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Non-Redeemable GICs:
- Typically, investors cannot access their funds until the GIC matures.
- Offers added commitment and security for a predetermined period.
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Redeemable and Cashable GICs:
- Investors have the flexibility to access their funds before maturity.
- Cashable GICs provide greater liquidity but may come with additional terms like early redemption fees.
- Redeemable GICs offer a middle ground between non-redeemable and cashable options.
Considerations for Choosing GICs:
- Investors should consider factors such as term length, interest rate, and risk tolerance.
- Understanding the differences between GIC types, including when to choose foreign exchange GICs over domestic currency GICs.
In summary, GICs offer a diverse range of options catering to investors with varying preferences and risk appetites. The article provides a comprehensive overview of these GIC types, helping readers make informed decisions based on their financial goals and circ*mstances.