With Canada’s prime interest rate on the rise, chances are your interest in GICs is too. And with both attractive short-term and longer-term rates hitting the scene, there are a variety of options for those with funds at the ready to take advantage of this low-risk investment product.
“Cash is king in this aggressive rate-rising economy,” says George Chen, AVP, Cash Management, who’s based out of CWB’s BC Regional office in Vancouver. “Typically, the longer you put your money away in a GIC the better the rate you’ll receive. However, today’s short-term options are actually narrowing the gap between long and short-term rates and giving people more choices. So if you have cash on hand, GICs are a great way to grow your money while you’re waiting for the market to stabilize – and at the same time allow for some liquidity so you have flexibility if circumstances change."
To bet on another rate hike – or lock-in now?
Rajbir Bajwa, Account Manager, Personal Banking at CWB’s Surrey Banking Centre says lots of clients have been asking her lately whether to hang tight for higher rates or invest in a GIC now. Her answer? It’s a combination of both.
“I often hear, ok, I see it’s a great rate and I don’t want to miss out. But what if I lock in and then it goes up again, and I miss out on a better rate? What you want to do is divide up your funds, because if you keep waiting for the future, you’re losing out on today’s great rates,” says Bajwa. “Let’s say you have $100,000. Let’s put some of that in with the current rate and then keep some available so if the rates go up you have those funds to use.”
Adds Chen, this kind of approach can also help if you have a regular influx of extra cash coming in rather than a lump sum. “You can invest it in parts as cash becomes available. These short-term GIC rates are well-suited for a scenario like this,” he says.
Choosing your GIC term length
Bajwa says GIC terms are also top of mind for her clients these days – and that’s where GIC laddering strategies come into play. Building on the approach of dividing your lump sum into parts rather than putting all your eggs in one basket, laddering means to separate your investments into several GICs, each with different term lengths and interest rates. The beauty of this is there will always be a portion of your funds becoming available as the various terms mature.
“If you had a tendency in the past to lock everything into one GIC term, today’s economic volatility is really conducive to a more strategic, time-diversified approach,” says Bajwa. “People want to tap into the market, but at the same time they need liquidity. The short-term GICs are ideal for this because they offer a great rate and the time horizon isn’t too long. And then you can also add a strong longer-term rate into the mix for those savings goals that are a little further off.”
Putting time on your side – and money in your account
As Chen explains, whether it’s a true laddering strategy or something more informal, spreading out your investments over time advances your savings goals while taking some of the stress out of rate watching.
“Investing gradually or with portions of your lump sum allows you to take advantage of the current economy and also be poised to act on the next opportunity,” he says. “That way, whatever you decide, whatever happens with rate changes in the future, you haven’t missed any boats. Different money coming to maturity at different times gives you both access to cash and averages out to the best rate over time.”