A generational opportunity for safe investing in GICs has opened up this year, but don’t get carried away.
While the most popular terms for guaranteed investment certificates are one to five years, some financial players offer terms of six, seven and 10 years. A quirk of today’s rate environment explains why GICs get less attractive as you extend the term past five years.
Returns for shorter-term GICs and bonds are higher today than for the long term, which is known in financial circles as an inverted yield curve. You see this phenomenon when financial markets see high rates and inflation as a near-term issue and believe rates in the longer term will be lower.
A reader asked this week about where to find GICs with terms of more than five years. GICs with terms this long are unusual enough that you don’t typically find them listed on rate aggregator websites, and it’s hit or miss if you search bank by bank. Examples of banks showing rates for longer than 10 years on their websites include Bank of Montreal, Canadian Western Bank, EQ Bank, Laurentian Bank and Royal Bank of Canada.
EQ’s rate sheet highlights the disappointing returns from taking a term longer than five years. The bank’s non-registered rates peak at 5.75 per cent for one year and decline gradually to 5.1 per cent for five years. For six, seven and 10 years, you get 4.5 per cent.
A 4.5-per-cent return with virtually no risk thanks to deposit insurance isn’t terrible, especially when compared to the decades preceding last year’s run-up in interest rates. But if you’re going to invest for that long, you are very likely to earn much higher returns from stocks. The S&P/TSX composite index has had some killer ups and downs in the 10 years to Sept. 30, but it still managed to produce a 7.5 per cent total return based on dividends and share price gains.
Another consideration for long-term GICs is the lack of liquidity. If your financial goals change over time, breaking your GIC could be costly in penalties or foregone interest. This risk exists for four- and five-year terms, but seven and 10 years seem to present a higher level of risk that you’ll change your mind about your investments.
Finally, there’s inflation to consider. Inflation has proven to be unpredictable and resilient – if this continues for a while longer, a 10-year GIC yielding 4.5 per cent doesn’t give you as much of a near-term cushion as shorter term GIC offering 5 to nearly 6 per cent.
A old-fashioned GIC ladder of five years makes some sense right now. Extending out to 10 years seems excessive. A GIC ladder, by the way, means equal investments of money into terms of one through five years. On maturity, invest in a new five-year term.
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Rob Carrick