Life is stressful enough without worrying whether your investments are safe.
So if you're a conservative GIC investor, take a pass on the excellent interest rates that Home Capital is using to attract money through its Home Trust, Home Bank and Oaken Financial operations. At midweek, Oaken offered 2.6 per cent on a one-year guaranteed investment certificate and 3.1 per cent on a five-year term. A five-year bond issued by the federal government yields about 1 per cent these days, while banks are posting five-year GICs in the area of 1.5 per cent.
Home Capital is in the business of lending money to home buyers using funds generated from savers putting money in its high interest savings account and GICs. The company's recent troubles mean it must offer better rates to attract new money and hold onto funds invested in maturing GICs.
The rationale for ignoring these deals is in no way a comment on Home Capital's chances of survival and future success. Rather, it's based on the idea that the kind of person who traditionally gravitates to a GIC does so for a zero-stress investing experience. You may not get that with a GIC from Home Capital, even if its Home Bank, Home Trust and Oaken brands are all covered by Canada Deposit Insurance Corp.
CDIC is a trustworthy safety net for your savings and GIC investments. As long as you stay below the $100,000 limit for eligible accounts, principal and interest combined, you'll be fine. (CDIC is covered in more depth in this recent column). But I've been struck by reader e-mails over the past several weeks in which Home Capital GIC-holders were close to panic, even though they were within CDIC coverage limits in most cases.
One guy I spoke to tried to sell his GIC through his online brokerage, even though a penalty would have applied. He decided not to after getting a message saying a second step was involved – calling the broker to complete the transaction. He explained his nervousness as being a result of the fact that he's a contract worker who wanted to keep the money in his GIC super-safe.
Money in a CDIC-protected account will not be lost in a bank failure. But it could end up in a kind of administrative limbo for a brief period between a bank's collapse and payout by CDIC. This federal Crown corporation says it aims to pay deposits in non-registered accounts within three business days from the date a bank fails. People who have invested registered retirement money in GICs affected by a collapse would have to wait longer, perhaps weeks longer.
Rationally speaking, this is a manageable and perhaps even minor risk. But my sense is that investors on the whole are nervous these days, and GIC investors are even more so. Any news headlines about further problems at Home Capital would give them the exact kind of aggravation they sought to avoid by using GICs. Uncertainty about when they get their money would stress them out even more.
It's been seven years since a five-year federal government bond had an interest rate above 3 per cent. Putting the Oaken five-year GIC rate in that zone was a crafty move by the Home Capital people because there are plenty of investors who have shown a willingness to take on some risk in order to get better interest rates.
If you go for this offer, stay under CDIC's $100,000 coverage limit for combined principal and interest. This most basic of GIC-investing rules was not followed by some Home Capital GIC buyers in the past, so it's worth highlighting.
Be especially cautious about buying an Oaken GIC if you'll rely on it to pay monthly income through a registered retirement income fund. CDIC would protect the value of your GIC investment up to the $100,000 limit, but actual payments of income could be interrupted in a bank failure.
We have to acknowledge that investing is guided by two kinds of fear – fear of losing money and fear of missing out on great returns. If you pass on Home Capital's rates through Oaken, Home Trust and Home Bank, then the best you could do on GICs at midweek rates was 2 to 2.5 per cent for a five-year term.
These lower rates will be easier to accept if you remember why you bought GICs in the first place – to avoid the stress of worrying about whether your investments are safe.