Here's a bit of good news for the long-suffering investors who depend on guaranteed investment certificates for most or all of their holdings.
A new report from banking industry consultants McVay & Associates says competition between financial institutions selling GICs is likely to increase in the months ahead. This raises the possibility of slightly higher rates on these safest of safe investments.
The McVay report said GIC sales are already gaining momentum after a long run of slow or zero growth. The big banks are showing more interest in selling these products, and so are competitors such as online banks, trust companies and credit unions. Increased competition may give bank clients more leeway to negotiate better GIC rates, and it may prompt alternative financial institutions to sharpen their offers.
GIC rates are influenced by many of the same factors as bond yields, including expectations for inflation and economic growth. But competition between GIC issuers is also a factor. Posted GIC rates at the big banks top out around 1.6 per cent for a five-year term, and smaller competitors offer as much as 2.5 per cent. While they're doing better than the 0.6 per cent return of five-year Government of Canada bonds, many five-year GIC buyers are getting after-inflation returns of close to zero.
Behind the rising level of GIC competition is a need for money to lend out to people seeking mortgages. Lenders, particularly smaller ones, have made extensive use of securitization to fund mortgages. That means packaging up customer mortgages and selling them to institutional investors. Mr. McVay said these smaller lenders are now looking at selling more term deposits to individuals in order to diversify their source of funding for mortgages.
Investors, you'll have to be bolder if you're going to take advantage of the most competitive rates. The McVay report says most people buy their GICs from their primary bank, which suggests they're not getting anywhere close to the best rates. Alternatives include dealing with a deposit broker, an investment adviser or dealing directly with an independent GIC-issuing firm rather than through an intermediary.
For example, you could deal directly with Oaken Financial, a division of Home Trust with a five-year GIC at 2.5 per cent as of earlier this week. Peoples Trust had a five-year GIC at 2.45 per cent. Don't expect to see these GIC issuers on your online brokerage firm's GIC platform. More and more brokers are selling GICs online from a variety of third-party issuers, but I have heard complaints from readers that Oaken, at least, is not among them.
Check out the latest GIC rates here.
Rob Carrick