How GIC interest rates work

GICs are particularly safe because they give you a guaranteed return, unlike other investments that have variable returns, such as stocks and bonds. And when you invest in GICs at a financial institution that is a member of the Canada Deposit Insurance Corporation (CDIC), your deposits are eligible to be protected by government-backed insurance up to $100,000 per eligible account.

The low-risk nature of GICs makes them ideal when saving for a big goal with a deadline, like a down payment on a home or a big vacation, as well as when you want to protect your capital—for example, if you’re approaching retirement or already retired. Let’s take a look at how GIC interest rates are determined.

What affects GIC interest rates? 

GIC rates are primarily affected by the Bank of Canada’s (BoC) policy interest rate (also referred to as the target overnight rate or benchmark interest rate) and by market competition among banks for your deposits.

When the BoC raises the policy interest rate, banks must pay more to borrow money from each other. This cost is passed on to consumers in the form of higher rates for mortgages and lines of credit, but it also incentivizes banks to pay higher interest rates for deposits, including investments in GICs.

It’s a game of supply and demand. The more a bank requires deposits (cash for its offerings, like mortgages and loans), the more interest it will be willing to pay on its savings products. This often manifests as special offers, where a bank will pay above-market rates on some of its GICs. This not only creates better opportunities for investors but puts upward pressure on GIC rates as a whole.

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MCAN Wealth 1-year non-registered GIC

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• Interest rate: 4.05%
• Minimum amount: $1,000
• Eligible for CDIC coverage: Yes

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Rates are also affected by a GIC’s features. You can usually earn higher interest rates by committing to longer terms, like five or 10 years. But that’s not always the case. But you can also earn more interest for selecting a non-redeemable GIC, which may not be withdrawn early. Generally speaking, the less access you have to your funds before the GIC’s maturity date and the more committed you are to leaving your money inside the GIC, the more interest you will receive.

Some GICs link interest rates to the performance of stock market indexes, combining the principal guarantee of a GIC with the potential gains of riskier investments—these are usually called market-linked GICs. Some market-linked GICs, for example, pay guaranteed minimum returns with the possibility of higher returns based on the performance of their respective index funds. You can choose from a variety of Canadian and U.S. indexes, and terms ranging from two to five years.

Does it matter which account I hold my GICs? Will a TFSA or RRSP have an effect on rates?

You can also take advantage of high GIC rates using your registered accounts, including your registered retirement savings plan (RRSP) and tax-free savings account (TFSA).

When you invest in GICs inside your RRSP, you can defer the tax on your GIC income until you take withdrawals from your account in retirement. You may be in a lower income tax bracket than when you were working, making RRSPs advantageous. If you hold GICs in your TFSA, you can skip the tax on the returns altogether, subject to contribution limits. TFSA withdrawals are always tax-free.

There may be slightly different requirements when you buy GICs to hold in your RRSP or TFSA, though. Banks, credit unions and financial institutions may have their own different minimum term lengths or minimum investment amounts. Sometimes they offer different interest rates depending on the account type.

Get the best rates on your GIC investments

GICs can be flexible, safe investments. To earn the best GIC interest rates, sometimes the less flexible redemption options pay more, but not always. And don’t forget to make use of your TFSA and RRSP to save on tax and get even more out of your savings.

Read more about GICs as a good investment:

• Registered or non-registered GICs: Which should you buy?
• 6 times when a GIC is a smart investment choice
• What types of GICs are available in Canada?
• Why GICs are a good addition to an RRSP or a TFSA