The Different Types of GICs and Term Deposits

We’ve written about Guaranteed Investment Certificates (GICs) a lot lately. I know this because before I fell asleep last night, I started thinking about the different GIC types.  Afterward, I immediately thought, this is a really weird thing to think about right now. So, since my mind is fixated on the details surrounding GICs, let’s go one step further and really make sleeping a challenge tonight by covering the different types of GICs. How many are there, anyway? What are the differences between them?

Although some banks call them GICs while other banks call them term deposits, they’re really just two different terms for a similar investment product. You may find that some banks arbitrarily differentiate between the two products based on the length of a term. But the underlying products are mostly the same. We’ll keep things simple and call them GICs.

What have we covered so far? First, we explained how GICs work and reminded you that planting your real money in the ground is a terrible idea. (You’re welcome!) We also broke down GIC ownership types. That allowed us to explore the differences between client name and nominee name GICs, while capturing how incredibly exciting GICs can be for both first-time and veteran investors! (Hint: they’re not very exciting—but they’re not supposed to be!) We highlighted the role of issuers, touched on how a GIC financial network works, and even captured the benefits of working with brokers and agents in the deposit industry.

If you’re all caught up on our GIC content so far, maybe you too are lying awake at night wondering, what else is there to know about GICs? For the record, I really hope you’re not doing that. If you are, though, you’re in for a treat as we navigate the different types of GICs available to Canadians:

GIC Types Based on Different Ways of Calculating Interest

There are really two primary factors behind every GIC: the term and the interest rate. Financial institutions create different GIC products suited for different types of investors by simply configuring these two elements. Some clients want to see their return on investment sooner than others, and so they prefer to have a shorter-term and an earlier maturity date. Those short term GICs often come with smaller interest rates but the promise that the client will see a return on investment within just a few short months. Other investors don’t mind leaving their deposits a little longer. The benefit to long-term GICs is that they provide investors with a higher interest rate and the promise of a higher return on investment at the end of a term when the deposit reaches maturity.

Some investors like a little risk. Some don’t.

Adjusting the interest rate is one way for financial institutions to create variation and differentiated GIC products for different investors. While any of these GICs can be short-term or long-term deposits, each one uses a different method of calculating interest. Let’s take a look at them.

Types of GIC

Fixed-Rate GICs

The interest rate for fixed-rate GICs is agreed upon at the start of the term and it doesn’t change. In other words, it’s fixed. The interest for fixed-rate GICs is calculated at the end of the term when the GIC reaches maturity.

Variable-Rate GICs

Variable-rate GICs are a little different and provide the opportunity for investors to earn more interest on their deposits. For variable rate GICs, interest is linked to a bank’s prime rate. This means that when the bank’s prime rate goes up, the interest rate on the GIC goes up, too.

Adjustable-Rate GICs

This is a less-common term for a variable-rate GIC. The concept is the same. With an adjustable-rate GIC, the interest rate varies with a bank’s prime rate.

Step-Rate GICs

Sometimes called an “escalator” GIC, the step-rate GICs are notorious with using stairs to express how the interest rate is calculated. Unlike a variable-rate GIC where the interest rate can rise and fall over time, the interest on a step-rate GIC is guaranteed to rise every year. It only goes up.

Market-Linked GICs

Mixing elements of traditional GICs with stock-based investments, market-linked GICs are hybrid investment products that are linked to a specific stock market index. They offer the security of GIC-based insurance eligibility, while also providing the potential for a higher return on investment based on the performance of a specific market index. The complex GIC investment types can come with other limitations that could affect an investor’s return, including participation rates and limits on maximum returns.

Registered GICs

Registered GICs are held in government registered accounts like RRSPs, RDSPs, RESPs, and TFSAs. These GICs are not taxed and, as a result, offer a better return on investment. On the flipside, registered products are intended to be used for a specific purpose, and they come with rules and regulations that affect how investors can access their return once the investment matures.

Non-Registered GICs

GICs that are not held in registered investment products are referred to as non-registered GICs. These types of GICs are potentially taxable, but they don’t come with the same rules and regulations as registered investments, making it easier to withdraw your money after your investment matures.

Foreign Exchange GICs

GICs in non-Canadian currencies held at Canadian financial institutions are known as foreign exchange GICs. One popular option is a U.S. dollar GIC. These GICs allow investors to earn interest on foreign currency and are known to be great options for travelers or investors that sense a drop in the value of the Canadian dollar. Foreign exchange GICs are now insured by the Canada Deposit Insurance Corporation (CDIC). So, if a financial institution fails, your investment is insured.

Any of These GIC Types Can Be Non-Redeemable, Redeemable, or Cashable

One additional feature of GIC product types is that they can be either non-redeemable, redeemable, or cashable. Unless otherwise stated, GICs are typically non-redeemable. That means when investors deposit their funds into a GIC, they don’t have access to those funds until their investments mature. That’s a bit of a commitment.

Some investors prefer the added security of knowing that they can withdraw their money early if they need it. That’s what cashable and redeemable GICs are for. Cashable and redeemable GICs allow investors access to their money in the event of an emergency. In exchange for this extra security, these GICs typically come with additional terms like early redemption fees and redemption rates. The details between cashable and redeemable can get a bit cloudy, and the two terms are sometimes used synonymously—but there is a difference.

There’s a lot of options when it comes to GICs, and it can be hard to remember the details between them. You can reinforce your understanding of GIC types by imagining when you would want to choose one option over another. Ask yourself, when would you want to choose a foreign exchange GIC over one in domestic currency? Or what’s the difference between a variable rate and a stepped-rate GIC? These are perfect questions to help you remember the difference between GIC types.

Sources:

https://www.ratehub.ca/gics/market-linked-gic
https://www.ratehub.ca/blog/cashable-vs-redeemable-gics/
https://www.investopedia.com/terms/t/termdeposit.asp
https://www.canada.ca/en/financial-consumer-agency/services/financial-toolkit/saving/saving-2/3.html

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