Are GICs Making a Comeback?

By: Kevin-Barry Henry, #1 Bestselling Author

Do you remember GICs? The guaranteed interest certificates that have been paying out less than 1% interest for much of the last decade? Perhaps their time is returning.

As Canadians, we are presently all aware of the impact that inflation is causing on our everyday lives. Food, building supplies, fuel for your vehicle, used cars, and many more items have gone up significantly in the past few quarters. It has caused inflation in the US to reach 9.1% this week, and when Canada reports June numbers, we will not be far behind.

The bank of Canada is now being forced to contend with this inflation, and their main lever is increasing interest rates. Just this week, the bank of Canada surprised everyone with a 100 basis point raise, which is 4 times the regular move of 25 basis points.

This will have an impact on the cost of borrowing money, and it is already having an impact on the housing market.

Higher interest rates can also have a silver lining, however. It means that money that you invest in guaranteed interest-bearing investments now offer a higher interest rate. Nobody has really talked about GIC the last decade or so, but perhaps their time is returning.

Here is an old strategy that had fallen out of favor when interest rates became so low, but now, with interest rates rising, it might be time to dust off this old concept.

Let’s call it a “DIY” maturity guarantee.

The mechanics are quite simple:

• Pick a time in the future for a maturity guarantee
• Purchase a GIC for that term
• Find the present value of the deposit over that term using the GIC rate
• Invest the difference between the deposit and the present value in an equity fund.

Let’s look at an example:

• $100,000 to invest in an RRSP
• You want a 5-year principal guarantee
• GIC rate is 3.75% annually
• Present value of $100,000 five years in the future at 3.75% is $83,188
• Purchase 5-year GIC with $83,188
• Invest $16,812 in an equity guaranteed investment fund (GIF)

Five years from now, the value of the guaranteed investment fund (GIF) will hopefully have gone up in value (and habitual readers of this space will remember that the GIF deposit is also guaranteed), and the maturity value of the GIC will be $100,000, so your principal is still intact. Any rate of return on the fund will result in you having more than you invested, with a 100% guarantee.

And you can set up any maturity guarantee date, it doesn’t have to be 15 years as it is in most 100/100 guaranteed investment fund products.

This concept works best with RRSPs, LIRAs and TFSAs. It’s not as efficient with non-registered money because of the annual accrual taxation on the GIC.

So, if you are looking for a 3-year maturity guarantee, you can build your own package!

If you would like to chat more about this strategy or anything else, feel free to book a FREE 15-MINUTE CALL to chat.

With Gratitude,

KB.

THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.