GICs are particularly protected because they provide you a guaranteed return, unlike other investments with variable returns like stocks and bonds. And if you happen to spend money on GICs with a financial institution that could be a member of the Canada Deposit Insurance Corporation (CDIC), your deposits will be protected by government-backed insurance as much as $100,000 per eligible account.
Because of their low risk, GICs are ideal if you happen to’re saving for an enormous goal with a deadline, like a down payment on a house or an enormous vacation, in addition to if you would like to protect your capital – for instance, if you happen to’re nearing retirement or already retired. Let’s take a look at how GIC rates of interest are determined.
What influences GIC rates of interest?
GIC rates are primarily influenced by the Bank of Canada (BoC) policy rate (also referred to as the goal overnight rate or reference rate) and by market competition amongst banks to your deposits.
When the BoC raises the policy rate, banks must pay more to lend money to one another. This cost is passed on to consumers in the shape of upper rates of interest on mortgages and contours of credit, but it surely also gives banks an incentive to pay higher interest on deposits, including investments in GICs.
It’s a game of supply and demand. The more a bank requires deposits (money for its offerings resembling mortgages and loans), the more interest it’s willing to pay on its savings products. This often manifests itself in special offers where a bank pays above-market interest on a few of its GICs. This not only creates higher opportunities for investors, but in addition puts upward pressure on overall GIC rates.
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MCAN Wealth 1 12 months unregistered GIC
- Interest rate: 5.10%
- Minimum amount: 1,000 US dollars
- Eligibility for CDIC coverage: Yes
Interest rates are also affected by the features of a GIC. Typically, you may earn higher interest if you happen to select longer terms, resembling five or 10 years. But that is not all the time the case. However, you too can earn more interest if you happen to select a non-cashable GIC that cannot be withdrawn early. Generally speaking, the less access you might have to your funds before the GIC’s maturity date and the more committed you might be to keeping your money within the GIC, the more interest you may earn.
Some GICs link rates of interest to the performance of stock market indices, combining the capital guarantee of a GIC with the potential gains from riskier investments. These are typically known as market-linked GICs. For example, some market-linked GICs pay guaranteed minimum returns with the opportunity of higher returns based on the performance of their respective index funds. You can select from quite a lot of Canadian and U.S. indices and maturities starting from two to 5 years.
Does it matter which account I keep my GICs in? Will a TFSA or RRSP affect rates of interest?
You also can profit from rising GIC rates along with your registered accounts, including your registered retirement savings plan (RRSP) and your tax-free savings account (TFSA).
