By Nicholas Dobroruka on July 14, 2022
Estimated reading time: 6 minutes

Investing in GICs? Here’s why to buy them from an online bank

By Nicholas Dobroruka on July 14, 2022
Estimated reading time: 6 minutes

GICs are a low-risk investment option, and you can often find the highest GIC interest rates at Canada’s digital banks.

A young woman smiles at her laptop while hugging her dog

Photo by Andrea Piacquadio from Pexels

In today’s harsh investing climate, it’s nearly impossible to avoid volatility. What’s been particularly painful about the instability of this past year is the range of different asset classes hit. Whether you’ve been investing in stocks, gold or cryptocurrencies, your portfolio has likely seen some steep ups and downs. For example, the S&P/TSX Composite Index has already endured two 10% pullbacks in 2022, and Bitcoin has dropped more than 50% since the start of the year.

With plenty of question marks still surrounding the economy for the foreseeable future, many investors with short time horizons are now understandably searching for safer investment options. For anyone looking for a dependable—but also competitive—return on investment, guaranteed investment certificates (GICs) from a digital bank could be the answer.

What is a GIC?

When you buy a GIC, you lend an agreed-upon amount of money to a financial institution for a set period—anything from one month to 10 years. In return, you’re paid a fixed rate of interest on that money, typically on a monthly, semi-annual or annual basis.

Interest rates vary depending on the length of the GIC’s term, as well as the type of financial institution. Generally speaking, the longer the term of the GIC, the higher the interest rate. In addition, you can often find higher GIC rates at virtual and online banks, such as EQ Bank, because they have lower overhead costs than traditional brick-and-mortar banks and pass along those savings to their customers in the form of more competitive rates.

The interest earned on a GIC is guaranteed only if you hold the GIC until the end of its term, also known as the maturity date.

Why invest in a GIC from an online bank?

Low risk: The interest you earn on a GIC is guaranteed, unless you cash it out early (more details on redeemable and non-redeemable GICs below).
Flexibility: Digital banks offer a wide range of GIC options nowadays, so there’s sure to be one that fits your specific savings goal. GICs are an excellent option for short-term goals, as the guaranteed interest rate eliminates the risk of the market’s short-term uncertainty. Planning to retire in 10 years? GICs can also be an option for mid- to long-term savings goals where risk reduction is top of mind.
Eligible for RRSPs and TFSAs: GICs are eligible to be held in both non-registered accounts and registered accounts, including registered retirement savings plans (RRSPs) and tax-free savings account (TFSAs), which can help reduce your taxable income come tax time.
Hedging against volatility: GICs can help offset risk in an investment portfolio, which is especially important in today’s volatile market conditions.
Guaranteed means guaranteed: In the rare event that your financial institution closes or goes bankrupt, your GIC investment is eligible for Canada Deposit Insurance Corporation (CDIC) protection. The CDIC is a federal Crown corporation with the goal of contributing to the stability of the financial system in Canada.
Easy to start: Most banks require very low minimum deposits. At EQ Bank, for example, you can start investing in GICs with as little as $100.

Redeemable vs. non-redeemable GICs

When you buy a GIC, you can choose from redeemable and non-redeemable options. Here are the differences:

Redeemable GICs can be cashed in before their maturity date, but they typically offer lower interest rates and/or the financial institution may charge you a penalty for early redemption.
Non-redeemable GICs are less flexible, but pay out with higher rates. You can make a request to cash them in, but it’s up to the financial institution whether to allow it or not. If it does—typically only in cases of extreme financial hardship—it may charge you a penalty. (At EQ Bank, all GICs are non-redeemable.)

Before investing in a non-redeemable GIC, consider these potential risks:

If you need access to your funds but aren’t allowed to cash in the GIC early, you may need to borrow money instead, at a higher cost than what you’re earning on the GIC.
If interest rates rise, you may lose an opportunity to earn more interest elsewhere.

When shopping around for GICs, it’s useful to understand how interest rates are determined. Banks, whether online or bricks-and-mortar, don’t set their rates in isolation. Instead, they first take into consideration the current interest rate set by the Bank of Canada, called the prime rate (currently 6.45%), and then add a premium on top of that to come up with the appropriate GIC rate.

The benefits of investing with an online bank

Not sure if online banking is right for you? Here are a few reasons why so many Canadians are choosing digital banks for their financial needs.

Cost savings:

When it comes to banking with a brick-and-mortar financial institution, it’s easy to lose track of all the fees, such as monthly account fees and transaction fees. Many online banks offer low- or no-fee banking, as there is no need for all the overhead costs required to operate a large-scale bank with multiple locations and a sizeable staff.
Not only can online banks help their customers by eliminating unnecessary banking and brokerage fees (such as account maintenance fees and low-activity fees), but those savings can lead to more competitive interest rates, as well as the removal of steep minimum account balances.

Ease of banking:

Demand for online services increased during the pandemic, and banking was no exception. Now more than ever, Canadian consumers are aware of their specific banking needs and have been choosing online banks in unprecedented numbers.
The sign-up process for most online banks today is seamless. Customers no longer need to visit a physical bank and wait in line to speak to the next available teller.
In addition, many online banks today offer 24/7 customer service, accommodating customers’ busy lifestyles.

Why choose EQ Bank as your online financial institution?

EQ Bank offers some of the highest GIC rates in the industry today, and a wide range of term options, from 90 days to 10 years.
Clients can invest in both registered and non-registered savings accounts.
In addition to a simple sign-up process, you can begin investing in GICs with as little as $100.
All deposits in EQ Bank products are eligible for CDIC protection.

Get details about EQ Bank’s Personal Account*
Go to Site

Start investing in GICs today

With the end of the market’s extreme volatility not yet in sight, GICs offer investors a rare opportunity for a guaranteed return.

EQ Bank offers its customers a quick and easy sign-up process, as well as some of the most competitive and flexible GIC options in Canada.

This article is sponsored.

This is a paid post that is informative but also may feature a client’s product or service. These posts are written, edited and produced by MoneySense with assigned freelancers and approved by the client.

What does the * mean?

Affiliate (monetized) links can sometimes result in a payment to MoneySense (owned by Ratehub Inc.), which helps our website stay free to our users. If a link has an asterisk (*) or is labelled as “Featured,” it is an affiliate link. If a link is labelled as “Sponsored,” it is a paid placement, which may or may not have an affiliate link. Our editorial content will never be influenced by these links. We are committed to looking at all available products in the market. Where a product ranks in our article, and whether or not it’s included in the first place, is never driven by compensation. For more details, read our MoneySense Monetization policy.