Compare the best GIC rates in Canada 2022

In addition to the payment schedule, you will want to understand how interest is compounded for the GIC you are considering.

  • With simple interest, the bank only pays interest on the original principal. This means that if you invest $100,000 in a two-year GIC with a yield of 1.25%, you will receive $1,250 in interest each year. Thus, at the end of the second year, the interest payment will total $2,500.
  • With compound interest, the bank pays interest on the initial principal and the interest earned at each interval. For the same investment as above, with compound interest, you will earn $1,279.19 in interest after one year and $2,515.52 at the end of the two-year period. It’s an extra $15.52.

Obviously, compound interest is the most profitable option, but also pay attention to the payment schedule. In the scenario above, there is an annual payment, but if there was compound monthly interest, you would earn even more – at the end of your two-year term, the CIC would have $2,530.18 in interest monthly compounds.

Remember that you agree to the terms (the principal and how the interest will be paid) when you sign the GIC contract. Once done, you cannot change the terms and conditions. Payment terms will affect the amount of interest you will ultimately earn, so it is important that you review them carefully.

How does the Bank of Canada’s overnight rate affect GIC rates?

The Bank of Canada (BoC) sets a key interest rate, also known as the overnight rate. This is the interest rate at which financial institutions borrow or lend funds to each other, and it is almost always the lowest rate available at any given time. Financial institutions also have a prime rate, which moves in parallel with the Bank of Canada’s overnight rate.

Changes in the prime rate affect interest earned on GICs, high interest savings accounts (HISA) and other investment vehicles. When the overnight rate increases, individuals can earn higher interest on the aforementioned types of savings because financial institutions have more flexibility to compete on the interest rates they offer. On the other hand, people who are retired or living on a fixed income from a savings fund can be negatively affected when the overnight rate drops.

Does inflation affect GIC rates?

GICs are term deposits, which means that you essentially “lock in” them for a fixed term. If during this period the rate of inflation exceeds your interest rate, you will lose money in real terms. In the example above, your $100,000 deposit would earn $1,250 in simple interest at the end of the term. But if the inflation rate is 2%, you are actually losing 0.75%, or $750, per year. Deflation, on the other hand, can favor your investments and increase the purchasing power of the money you earn. All of this to say that inflation and deflation are important variables when evaluating the interest rates of the GICs available to you.

The best time to buy GICs

The best time to buy a GIC is when you’re saving for a goal, like tuition, a down payment, or a trip. But it can also be a good idea to invest in GICs when you feel risk averse. You may be considering a GIC as a way to balance your portfolio or generate passive income in retirement or if you take time off from work to raise your family, for example. While GICs don’t tend to have the highest interest rates of any investment vehicle available to Canadians, they offer a low-risk way to store money while earning interest.

If you’re considering adding a GIC to your portfolio, you’ll want to pay attention to a few key numbers. The interest rate of the GIC itself is a good place to start. Generally, the higher the interest rate, the more attractive the product. It’s also beneficial to look at the likely rate of inflation or deflation you can expect over the term to determine if that factor is likely to eat away at or improve your earnings. If you find the numbers work, a GIC can be a great risk-free investment for a set period of time.

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