Monday, 12 August 2013

Tools and Tips for Picking the Highest Rate GIC

Guaranteed Investment Certificates are probably the simplest to understand investment security. A couple of good overviews of the basics are the 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.

Finding the available GICs and key data
CANNEX is 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 53 banks, trust companies and credit unions that offer GICs. 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. 

Most important in a practical sense is that only a much-reduced selection is available from the typical self-directed discount brokerage. Discount brokers do not usually offer the highest rate GICs. Chasing the highest rates outside your main brokerage account might involve creating a spaghetti of accounts over time, which will get cumbersome and unwieldy to manage, for example when reinvesting matured funds. Thus it will be necessary to decide whether the convenience of having all investments together at the broker, with instantaneous online account management, offsets what will not be the highest rate in the market.

Your broker's GIC offerings will be found in the fixed income section. Online broker investment minimums are often higher at $5000 than the $1000 minimum many GIC providers offer when investors deal directly with them, as shown in the CANNEX tables.

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?

This calculator will help you do the numbers:

  • Compound Interest Calculator from - 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.
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, semi-annually or annually, the total interest paid out by the end is calculated the same way. Note however, that the interest rates offered on GICs that pay more often are lower than for annual pay GICs.

Let's look for a GIC to hold in an RRSP in a self-directed discount brokerage available to someone living in Ontario.

According to, ICICI Bank offers a 5 year GIC with 1.75% compounded annually with a minimum investment of $1000. Looks attractive relative to what big banks are offering per the CANNEX list. Meanwhile, a GIC inventory search at brokerage BMO InvestorLine for a 5-year investment turns up a best rate of only 1.53% compounded annually from Homequity Bank while the ICICI Bank offering is only 1.50%. At the ICICI website itself the best 5-year rate is only 1.55%. 

Lesson number 1 - Rates vary, even from the same provider for the same GIC.

Note also that BMO's minimum investment is $5000, while it is only $1000 when buying direct from ICICI. 

Lesson number 2 - Rates on cashable or redeemable GICs are significantly lower than on the non-redeemable locked-in version. In ICICI's case the 5 year cashable pays only 1.15% interest. In addition, if the redeemable ICICI is redeemed early there will only be interest paid at an annual rate of 0.50% 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.

Another item of note is that there are a lot of odd and unknown names in the CANNEX list of GIC providers e.g. how many people have heard of ICICI Bank and Homequity Bank? The important fact to observe is that both provide GICs backed by the Canada Deposit Insurance Corporation, behind which stands the Government of Canada. Up to $100,000 of principal and interest in GIC money per institution is guaranteed by CDIC. As far as this blogger is concerned an ICICI GIC is therefore just as safe as a Royal Bank GIC, though the chances of actually needing to invoke the guarantee is not the same.

Returns - Using the WebMath calculator, the total interest on a 5 year $5000 investment would be:

  • ICICI 1.50% Annual Compound Non-redeem from BMO InvestorLine - $386.42
  • ICICI 1.55% Annual Compound Non-redeem direct from ICICI - $399.70
  • Homequity Bank 1.53% Annual Compound BMO InvestorLine - $394.39
  • Homequity Bank 1.53% Annual Pay BMO InvestorLine - $382.50
  • Homequity Bank 1.49% Semi-Annual Pay BMO InvestorLine - $372.50 
  • Homequity Bank 1.44% Monthly Pay BMO InvestorLine - $360.00
  • Sun Life Financial 0.40% Annual Compound BMO InvestorLine - $100.80
  • AcceleRate Financial 2.1% Annual Compound direct from AcceleRate - $547.52

The next to last example of Sun Life is the lowest paying 5 year GIC in BMO's list. Clearly, the choice of provider makes the most difference to the investor's return. 

The last example of AcceleRate, the highest in the CANNEX list, indicates a fairly substantial higher return. But there's a catch, the deposit is not CDIC insured; it is backed only by the Deposit Guarantee Corporation of Manitoba a far less solid guarantor.

Bottom Line: Are the above differences worth it? It's up to each investor to decide but clearly it pays to compare alternatives. Rates are so low these days that the differences matter even more.

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.


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.