You Need To Shop Around When Buying GICs
I have written about GICs several times over the past few years and the risks that these “no risk” investments really carry. Primarily, the concerns I have are that with such low interest rates, your net return after taking taxes and inflation into account are almost always in the negatives. Why would someone buy something with a “guaranteed” negative return?
Having said that I do understand that for some people, the zero volatility that GICs carry is the most risk that they are willing to take with their money. So if you do fall into this category and would still prefer to hold only GICs, do me a favour and at least make sure you’re buying the best GIC products possible.
You see, with ultra low interest rates, the small differences in rates between GIC providers matter even more and you need to shop around. Hopefully by now, people still don’t go to only one bank when they want a mortgage or ask only one insurance company for a quote when they want to buy life insurance right? Of course not! You would go talk to a mortgage broker who will shop around for you or an independent life insurance advisor who will compare quotes from all of the carriers. When it comes to GICs, you need to talk to an investment advisor who will do the exact same thing.
In general, we are seeing much better GIC rates from smaller credit unions at the moment and the difference in rates that they offer when compared to big banks is pretty substantial. But even within the different credit unions, the rates vary quite a bit. So let’s take a look at some examples (I’ll keep names out of this to protect the guilty…:
Let’s say you have $75,000 of GIC maturing and you want to renew it for an 18 month term. I took a look at the rates being offered by a couple of the big 5 banks in Canada and found the best rates to be around 0.9 to 0.95%. A few advertised “specials” and the rates increased to the 1.2% range. So how about the credit union offerings? A quick scan of some providers showed a wide variety of rates including ones at or lower than the big banks but several had 18 month GICs (with the same terms) in the 1.5 to 1.6% range.
I’m sure the bank representative will argue that they can match another offer or will provide a better rate for a larger amount but does that really help? The bank will only match the other offer if you present it to them and the other GIC providers will give higher rates for large amounts too.
Looking at 5 year GICs, I saw the same spreads with offers as low as 1.5% and some pushing into the 2% range. You might say that 0.5% per year of extra interest isn’t all that much money but when we’re only talking about 1-2% in total, that extra 0.5% makes a pretty big difference! After taking taxes and inflation into account, it could mean the difference between a positive and a negative net return.
Investing in GICs has some drawbacks for sure but as stated above, they are the right and sometimes only choice for certain investors. If you are one of those people, make sure that you have a trusted advisor shop around to get the best possible rates for you.