Q&A: Laddered GICs

Question: I am looking into purchasing a five-year non-registered GIC for long-term savings. I was looking at PC Financial’s GIC with a rate of 3% but was wondering if it is a good time to lock in since interest rates seem to be close to rising? Additionally I have seen laddered GICs such as Scotiabank’s but was wondering what the advantages and disadvantages are? I am looking for something to move my Canada Savings Bonds into as I accumulate them from my automatic payroll since CSB rates are 0.4%. Is there a better option than GICs? – Carlo C.

Gordon Pape answers: It all depends on how much risk you are prepared to take. CSBs are about as safe an investment as there is but at 0.4% return you might as well put your cash in a safe deposit box. GICs that are covered by deposit insurance are just about as safe and the return is higher so if safety is your number one priority then by all means consider them.

However, as you correctly point out, now is not the best time to lock in for the long term with interest rates expected to rise. Laddered GICs offer the advantage of being able to redeem a portion of the money each year to reinvest at prevailing rates at the time. In the case of a five-year laddered GIC, you can redeem 20% annually; for a three-year GIC it is 33.3%. Scotiabank’s rates on laddered GICs at the time of writing were 1.95% for three years and 2.6% for five years.

Don’t confuse laddered GICs with escalating rate GICs (Scotiabank calls their version an “Accelerated Rate GIC”). These GICs increase the interest rate paid each year, which looks attractive at first glance. For example, Scotiabank’s five-year Accelerated Rate GIC was offering 6% in the final year when this was written. But the key number to look at is the average interest rate to maturity which in this case is a much less impressive 2.9334%. As interest rates rise, so will the returns on this type of GIC so I don’t advise locking in to this (or anything else) for five years right now. A high-interest savings account might be a better short-term choice. ING Direct was recently paying 1.2% on their Investment Savings Account.

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