Guaranteed Investment Certificates (GIC’s)
Our role as a deposit broker is to shop for the best GIC rates on behalf of our clients. We survey over 40 financial institutions across the country to obtain the best GIC rates for our clients. It's fast, it's easy, it saves you time and gets your money working harder for you sooner.
All of the financial institutions we deal with are protected by the Canadian Deposit Insurance Corporation (CDIC), the Credit Union Deposit Insurance Corporation (CUDIC) or the Credit Union Deposit Guarantee Corporation (CUDGC).
We use a company called Deposit Broker Services to search out the best rates available and to administer all of our GIC offerings.
Why Use a Deposit Broker versus the Bank?
There are several great reasons to use a deposit broker instead of a bank!
- Personal Service: You benefit from the best products developed by the large banks and trust companies, while at the same time you get the service that only a small company can provide.
- Best Rates: Deposit Brokers have access to higher GIC rates from their network of banks, trust companies and credit unions.
- One Stop Shopping: By using Deposit Broker Services we do the rate shopping for you at no cost to you and we are paid by the financial institution not you.
What Is Protected?
Canada Deposit Insurance Corporation is a federal Crown Corporation created in 1967 to insure eligible deposits at CDIC member institutions: banks, trust companies and loan companies.
Credit Union Deposit Insurance Corporation (CUDIC) is a government corporation, was established in 1958 to protect credit union members deposits held by British Columbia credit unions. CUDIC's responsibility is to administer and operate a deposit insurance fund. The Financial Institutions Commissions (FICOM), an agency of the Government of British Columbia, is responsible for administering CUDIC and for administering the regulation of financial institutions operating in the province.
Eligible deposits include:
- Savings and chequing accounts
- Term deposits, such as GIC's
Term deposits must be repayable no later than five years after the date of deposit Deposits must be payable in Canada and in Canadian currency.
By law, the maximum basic protection for eligible deposits is $100,000 per depositor (principal and interest combined) in each member institution. Deposits are not insured separately in each branch office of a member institution. For additional information, call CDIC direct at (800) 461-CDIC or visit their web site: www.cdic.ca.
Laddering: A GIC Investment Strategy
Laddering is an investment strategy that refers to the structure of a GIC portfolio in such a way that an equal portion of the portfolio matures on an annual basis. Once in place, a laddered portfolio can provide the potential for higher yields by purchasing five year GIC's and still have GIC's maturing every year.
Reduced Risk?: The secondary benefit to a laddered portfolio is the reduced risk of having the bulk of your GIC portfolio maturing at a time when interest rates are low, and thus dramatically reducing the overall yield.
Increased Liquidity?: The third, and sometimes overlooked advantage, is increased liquidity. By having a portion of the GIC portfolio maturing every year, one has more flexibility to address unexpected emergencies or opportunities that may come up.
How to Build Your Ladder
If you have say, $100,000, divide the investment into equal amounts of $20,000. Invest $20,000 for 1 year, $20,000 for 2 years, $20,000 for 3 years, $20,000 for 4 years, and $20,000 for 5 years. As your GIC's mature each year, a 5 year term is then purchased. By the end of the first five years, all your GIC's will be 5 year terms with a GIC maturing every year. Since five year GIC's historically offer higher interest rates than shorter term GIC's, the rate of return on the total portfolio will be higher.
Beware of Tiered rates
A very popular sales technique for financial companies to gain deposit business is to promote tiered rate GIC's. They are marketed as Escalator GIC's, Rate Riser GIC's or Step-Rate GIC's.
These GIC's are usually 5 year terms and are advertised with high rates paid in the 5th year. However, be aware that the early years in the GIC take much of the gain away. The real or effective rate is often less than a 4 or 5 year fixed rate GIC. For example, a GIC pays 2.5% in the 1st year, 3% in the 2nd year, 3 .25% in the 3rd year, 3.5% in the 4th year and 6.5% in the 5th year.
One tends to focus on the 6.5%. However if you calculate the average annual rate, you realize this GIC actually pays only 3.75% over the 5-year period. Since the real return works out to be only 3.75%, it is very likely that you could have purchased a normal 5 year GIC and received a higher rate.
Remember, marketing is all about selling the sizzle. One must take great care and buy the steak, not the sizzle.