Monday, 12 August 2013

Tools and Tips for Picking the Highest Rate GIC

Guaranteed Investment Certificates are probably the simplest to understand investment security around - for a good run-down, see the GetSmarterAboutMoney.ca primer on GICs and BalanceJunkie's GIC Frequently Asked Questions. Yet they still offer a few challenges and tricky bits for the investor trying to find the best return. Let's explore the issues and how to deal with them.

Finding the available GICs and key data
The most complete and up-to-date source of current GICs with data on rates by length of term, minimum deposit, redeemability and registered vs non-registered account eligibility for all 75 banks, trust companies and credit unions that offer GICs is CANNEX. Unfortunately, the free information does not include important columns for compounding frequency or payment frequency. Nor are tables sortable to quickly enable finding the highest rate on offer. That's important because rates and competitive conditions change so the company offering the best rate today won't necessarily be the same next week or even tomorrow.

GIC search and sort tables are available from:
  • RateSupermarket.ca - search by investor's Province, principal to invest, registered vs non-reg account and term; excellent pop-up help and side-by-side comparisons; check rates as some may have changed
  • GlobeInvestor - different tables for short vs long term, registered vs non-reg; click on columns to sort high to low rates, minimum deposit, redeemability, compound frequency, payment frequency; a downside is inability to sort on multiple criteria at once so the tables occupy many pages
Alas, the practical reality is that not every GIC will be available from your online broker. Go through the fixed income section of your broker's website to find what it is offering. In addition, the investment minimum may be higher than by dealing directly with the company. Then it will be necessary to decide whether the convenience of having all investments together at the broker, with instantaneous online account management, offsets what may not be the highest rate in the market.

Calculators to compare rates
In order to decide if the payoff of a higher rate elsewhere is worth the extra effort, it helps to know the bottom line difference in dollars of interest earned. In addition, the databases and tables above do not show the different end dollar results of several choices and trade-offs - how much does annual vs semi-annual vs monthly compounding affect things, or does a higher annual rate with no compounding work out better than compounding, or does locking in for a year have a big enough payoff compared to a lower rate redeemable GIC?

These calculators are very handy to see the relative numbers:
  • Compound Interest Calculator from WebMath.com - pop in four numbers investment amount, interest rate, times compounded per year (i.e. annual = 1, semi-annual = 2 etc), number of years invested. The calculator shows the arithmetic detail step by step of how this works out which really helps to avoid entering the data incorrectly to get the right answer.
  • ICICI Bank's Term Deposit Comparison - calculates for GICs that compound interest and pay out only at maturity; makes things easy with drop-down selectors for term, interest rate and compounding frequency with the added feature of doing two different interest rates at once.
  • Non-Compounding GICs - These are simple enough that no fancy calculator is required. Do this: Published Interest Rate x Principal Amount x Number of Years Term e.g. Home Trust's 5-year GIC - 2.67% x $5000 x 5 years = $667.50 in total interest. It doesn't matter whether the payout is monthly, annually or in between, the total interest paid out by the end is exactly the same.
Examples
Let's look for a GIC to hold in an RRSP.

According to all three of GlobeInvestor, RateSupermarket.ca and CANNEX, ICICI Bank offers a 5 year GIC with 3.15% compounded annually with a minimum investment of $1000. Looks very attractive. MAXA Financial offers a 2.7% annual payout / no compounding 5-year GIC, the highest rate for payout GICs. Meanwhile, a GIC inventory search at BMO InvestorLine for a 5-year investment turns up a best rate of 2.67% compounded annually from Home Trust with 2.62% for semi-annual compounding and 2.57% for monthly compounding, all of which are non-redeemable. Which option is best?

First, we note that BMO's minimum investment is $5000, while it is only $1000 (ICICI and Home Trust) or $500 (MAXA) when dealing directly with each provider. That's perhaps an important factor to some investors.

Second, upon checking ICICI's own website, we see that the highest current rate for a non-redeemable GIC is 2.85% and 2.65% for a redeemable. MAXA does check out the same as the databases. Lesson, even the best databases may be slightly behind changes. It's worth checking the provider website.

Third, if the redeemable ICICI is redeemed early there will only be interest paid at an annual rate of 0.75% and that's after being invested a minimum of six months. Up to six months, principal is returned without any interest. That's quite a severe penalty.

Fourth, upon checking Home Trust's website, it appears that investors dealing directly with them will earn an extra 0.25% on new investments temporarily till August 31st.

Returns - Using the ICICI calculator, the total interest on a $5000 investment would be:
  • ICICI 2.85% Annual Compound Non-redeem - $754.29
  • ICICI 2.65% Annual Compound Redeem - $698.56
  • MAXA Financial 2.7% Annual Payout - $675.00
  • Home Trust 2.67% Annual Compound BMO InvestorLine - $704.11
  • Home Trust 2.92% Annual Cmpd Direct - $773.90
  • Home Trust 2.65% Semi Cmpd BMOIL - $703.43
  • Home Trust 2.57% Monthly Cmpd BMOIL - $684.83

Bottom Line: Are the above differences worth it? It's up to each investor to decide but clearly it pays to compare alternatives. There is an almost $100 or 15% difference in total interest after 5 years amongst even the top of the range alternatives. And we have not even considered the lowest paying GICs like Great West Life's 1.15% non-compounding monthly payout GIC, which would return only $287.50 in interest.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

2 comments:

Anonymous said...

ICICI does have a 3.15% gic but its only available in an rsp. Go to the website above and click on the rsp tab.

CanadianInvestor said...

Thanks Anon, the rate also is offered for a TFSA I notice ... but it seems to have just dropped down to 3.0%. These things never stay still! It's always good to check first.