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Why GIC rates may soon head lower even in the wake of the BoC rate hike

As a seller of GICs and mortgages, Brandon Brot is the first to hear about how the financial industry is reacting to the recent rise in interest rates.

Every day, he receives bulletins about changes in rates for both guaranteed investment certificates and mortgages. "We're getting mortgage rate increase, mortgage rate increase, mortgage rate increase these days," said Mr. Brot, a principal at GIC Wealth Management. "But we don't see anything on the GIC side."

The Bank of Canada's first increase in its benchmark lending rate in seven years has either directly or indirectly fed increases in borrowing costs for mortgages, lines of credit and loans in the past week or so. The story for savers can be summed up in a word – crickets.

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Savings account rates, typically well below 1 per cent at the big banks, haven't moved. Two GIC brokers, Mr. Brot and Mary Rygiel of ConservativeInvestors' Services, report zero changes in rates at the many GIC issuers they have relationships with.

Mr. Brot said the GIC market is influenced to some extent by troubled alternative mortgage lender Home Capital Group, which introduced market-leading rates back in late May. Some competitors adjusted their rates in response to Home Capital back then and have not responded to the recent move higher in rates.

Home Capital boosted its rates to attract money from investors who were reluctant to deal with the company as a result of a conflict it had with securities regulators. That matter is now being resolved, and Home has received financial support from renowned U.S. investor Warren Buffett through his holding company, Berkshire Hathaway.

Oaken Financial, a Home-owned operation that deals directly with investors, has been offering 2.75 per cent for one-year GICs, 3.05 per cent for a three-year term and 3.25 per cent for five years. These rates have forced other players to up their game, although none have matched Home Capital's rates. Mr. Brot said the best five-year rate he's been able to find from a non-Home Capital firm was 2.75 per cent.

His feeling is that, with Berkshire's appearance on the scene, Home Capital may not have to offer premium rates much longer through Oaken and its Home Bank and Home Trust subsidiaries. Any move lower by Home Capital could cause competing financial institutions that have raised rates since late May to ease back a bit. "I'm telling clients that, if anything, I think our rates are going to go down."

Ms. Rygiel said some of the biggest GIC players didn't respond to Home Capital's rate increase, and they're still not budging. She doesn't think these particular issuers would cut rates if Home Capital lowered its GIC returns.

Money taken in by financial firms via GIC investments is typically used to fund mortgages. Ms. Rygiel pointed out that financial firms have been improving their profit margins by raising mortgage rates and leaving GIC returns where they were. She says, however, that another move higher in rates later this year would probably push GIC rates higher.

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The savvy way to ready yourself to capitalize on rising rates is to use a GIC ladder, where you evenly divide your money into deposits maturing one through three years and then invest maturing money into a new three-year term. Laddering is typically done over five years, but the benefits of locking money in for that long right now aren't great. Regardless of whether you go with a three- or five-year ladder, you will have the opportunity every year to benefit from rising rates.

As widely used as laddering is, Mr. Brot finds a lot of people these days prefer to keep rolling over one-year GICs in hopes of renewing at better rates. His response is that rates would have to increase a lot over the next couple of years to beat the returns from a GIC ladder.

While there's been endless talk in recent weeks about the effect rising rates will have on borrowers, savers have clearly been anticipating some benefit for them. Both Mr. Brot and Ms. Rygiel say they've been taking phone calls from clients lately asking whether GIC rates are rising. "There is a little disappointment that nothing has happened," Ms. Rygiel said. "But people have been frustrated [about rates] for the past 10 years."

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