Interest rates

High interest rates make GICs more popular in Canada. Why is that? – National

Rising interest rates could be bad news for Canadians with mortgages, but it also means higher rates on savings vehicles such as guaranteed investment certificates (GICs), prompting renewed interest. interest in investments.

Mahima Poddar, senior vice president and group head of personal banking at Equitable Bank, said GICs have not been popular in recent years, but with rising rates they are now more attractive and in demand by EQ Bank, the bank’s digital platform, has never been higher.

“I think we’re going to see more and more people going back to GICs,” she said.

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According to rate-monitoring website, GIC rates are now north of four percent, with some offers for five-year investments reaching five percent.

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And although the annual rate of inflation exceeds the rates offered by GICs, the secured nature of the investment may be attractive to investors burned by the market downturn this year.

“When you compare that to a guaranteed 5% downside risk-free rate, it becomes incredibly attractive,” Poddar said.

Naveen Senthamilselvan, director of strategic initiatives at Meridian Credit Union, said that in the spring of last year, GICs were between 1 and 1.5%, while today they pay between 4 and 5%. .

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However, he said it’s always important to work with an advisor to make sure you have the right option, as GICs can vary depending on how easily you can access the money and your rate. of yield.

“That’s what you really need to understand and discuss with your advisor. What are my options and what really suits your needs as an investor. Do you need money in six months, do you need that flexibility. Are you ok with putting a portion of your GIC into a longer-term non-redeemable fixed fund,” he said.

“You want to be informed when you make that final decision.”

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Depending on what you choose, they can be cashable or non-redeemable for a term you decide, with repayable options usually paying a lower interest rate. The length of term can also vary, with longer term options generally offering higher interest rates. Interest payment schedules may also differ from offer to offer.

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Senthamilselvan said many investors consider a laddered strategy in which a portion of their money in GICs matures each year, giving them the flexibility to reinvest or reallocate a portion of their overall investment each year.

Aarash Rafiaie, financial planner at RBC, said understanding why you need the money is important because it will guide how the money should be invested.

“I think the majority of Canadians need to plan more now than they probably have in the past, especially as we see volatility not only in stock markets but also in interest rates. “, did he declare.

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Rafiaie said GICs can be a great source of safe income, but depending on the option, they may not be redeemed as easily if you need the cash when you compare them to a bond or a dividend-paying stock. . However, he added that GICs are safer than bonds or stocks, which can fluctuate with the market.

“There’s usually more volatility in stock investing in general and even in bonds than there would be in the GIC world because you have a fixed rate, a fixed term, you know and that’s is everything, but the risk could be that you might not beat inflation,” he said.

Poddar added that it’s important to shop around when looking for a GIC, as rates vary from institution to institution and to stay on top of these as they roll over. to ensure you always get the best rate available.

“You’ll see quite a big variation in rates,” she said.

This report from The Canadian Press was first published on August 11, 2022.

© 2022 The Canadian Press