# how GIC rates work out?



## imark (Jan 16, 2010)

for xample:

Yr 1 : 2%
Yr 2 : 2.25%
Yrs 3 : 2,65%
Yrs 4 : 2.85%
Yrs 5 : 3.6%
question 1: are interests compounded (monthly or yearly) if at all?
question 2: are rates fixed or go up or down following banks interest rates?
question 3: many financial institutions offer higher rates than banks. how do they do it? Are they trust worthy as big banks?
question 4: Is GIC is the best secure saving for retired person like me to invest 100,000 cad (50% of total to be invested)
I appreciate your advise and comments.
Imark


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## stardancer (Apr 26, 2009)

1. Banks offer various kinds of gic's; some are simple interest, and some are compound interest. It depends on which one you buy.

2. Again it depends on whether you buy a fixed interest gic or a variable gic. Usually, rates are fixed if the gic is for a longer term.

3. Can't answer this one. I think it has to do with if the gic is covered by CDIC or not. If it is, such as at a bank, then the bank pays the premiums as part of their cost of doing business. Whether another institution is trustworthy or not, depends on the company. 

4. For safety, a gic is best, but then it depends on your purpose for the money. The safer the investment, the less return you get. Being retired, I have some of my $$ in gic's for specific purposes, and some in other investments, for a mixture of safety and growth. I'm glad I had some in gic's because the amount I put aside for a new roof will be needed this summer; if the market is going flat for a while, I don't want to take the $$ from there.


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## OptsyEagle (Nov 29, 2009)

_"question 3: many financial institutions offer higher rates than banks. how do they do it? Are they trust worthy as big banks?"_

The question is probably better put, why do banks offer such low rates? You will usually find that if you obtain your GICs though a broker, you will obtain rates between 0.50% to 1.00% higher than you will from the 5 major banks. Not only will the GICs offered by financial institutions, of which you may never have heard of be higher, but the GICs from those very same 5 banks, will also be higher through a broker, than at your branch.

This is for three reasons. 

1) The banks need to compete more aggressively with brokers, since these brokers can buy any GIC for their clients, at the click of a mouse and have all the offered rates available for comparison.
2) It is cheaper to provide GICs through brokers than it is to maintain a bank branch outlet, and those savings are passed on to broker clients and the costs are taken from branch clients
3) Most people don't know this and they simply and mindlessly walk into the bank and give over their money. In this environment, why would a bank ever want to pay you more?

The GIC business is quite simple. Take the 1 to 5 year GIC rates, that are offered, and compare them to the 1 to 5 year fixed mortgage rates offered. The difference will be what we call the spread or the gross profit the banks are taking. In there lies the wiggle room, so to speak. If you are sitting in a bank branch, you can be sure that the bank will need at least 1.5% to 1.75% spread to make a profit. Through a broker, these numbers can be reduced to as low as 0.75% to 1.00%. You also have to assume that the guy obtaining a mortgage is also aggressively negotiating.

As for the safety of these other institutions. If they are CDIC insured (and all banks except some credit unions, pretty much are) then the safety is the same. Don't worry about it. Take the best rate.


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## mario 1 (Nov 6, 2009)

Why bother with a GIC in such a low interest rate environment.
Some savings accounts pay as much as GIC's without locking up your money.
The big banks are not your best choice, shop around for best rates.


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## Dana (Nov 17, 2009)

imark said:


> question 3: many financial institutions offer higher rates than banks. how do they do it? Are they trust worthy as big banks?



The big banks are schedule 1 banks and must use treasury bills and short-term government paper to back their GICs. Other Financial Institutions have the leeway to use bond markets or some corporate paper to pin their rates against. 

If you are worried about safety, make sure the GIC you invest in is CDIC insured.


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## Dr_V (Oct 27, 2009)

stardancer said:


> 4. For safety, a gic is best, but then it depends on your purpose for the money.


That depends how you define "safety". If you define safety as income after taxes _and inflation_, GICs are not guaranteed to preserve your capital by any stretch -- in fact, they can be rather unsafe.



> During the last 30 years, investors who paid personal income tax at a marginal rate higher than 35.55 percent earned a negative after-tax and after-inf lation rate of return from investing in and continuously rolling over short-term (one-year) GICs.
> Investors who invested in and rolled over three-year and five-year GICs realized a negative return if their marginal tax rate was higher than approximately 42 percent (assuming annual taxation of interest income).


Reference. (_The Erosion of GIC Returns by Income Taxes and Inflation_, by Amin Mawani, Moshe Milevsky, and Josh Landzberg.)

K.


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## OptsyEagle (Nov 29, 2009)

_"The big banks are schedule 1 banks and must use treasury bills and short-term government paper to back their GICs. "_

This statement is incorrect.

Again, look at the CDIC coverage. If it is there, you are being guaranteed by the Government of Canada. You will not lose any money for deposit, less than $100,000.


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## Dana (Nov 17, 2009)

OptsyEagle said:


> This statement is incorrect.


Let me elaborate...Schedule 1 banks must adhere to the risk-based capital ratio targets established by OSFI in 1999. Ultimately this results in more prudent investment of funds that are deemed to be 'debts to the public' or current and demand accounts. 

Schedule 1 banks have argued that these regulations make it more difficult for them to remain competitive against schedule 2 banks and other financial institutions doing business in Canada and they should therefore be allowed to merge to respond to the increasing competitiveness of the marketplace. 

It should also be noted that these risk-based capital ratios have been held up as a model internationally and are part of the reason that Canada is deemed to have one of the strongest and most stable banking models in the world.


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## venter (Apr 10, 2009)

I am a GIC broker amongst other things so I can tell you this: We offer GIC from all kinds of CDIC insured banks/trusts/mortgage co's etc at higher rates than the banks. Depends on who need to raise cash to lend out the most at the time as to who is offering the best rates. I am also Life Licensed and Life Cos offer something called Guaranteed Interest Contracts, often at higher rates than the banks (insured by Assuris to $60k per deposit). I personally have purchased GICs from Outlook and Achernar in Manitoba as well at higher rates than the banks offer (Manitoba Trust cos have their own insurance fund that cover deposits).

Send me a pm if you have more questions or go to my website http://hamiltonfinanceadvice.vpweb.com


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## Oldroe (Sep 18, 2009)

Remember to negotiate a better rate. Doesn't matter who you are lending your money to.


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## lb71 (Apr 3, 2009)

imark said:


> Yr 1 : 2%
> Yr 2 : 2.25%
> Yrs 3 : 2,65%
> Yrs 4 : 2.85%
> ...


Generally, when you see rates posted like this (ie, rates for 1 to 5 years), they would be fixed for the term and compounded annually.


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## sprocket1200 (Aug 21, 2009)

those rates are far lower than the div yield available today. just go get some good yielding div stocks that consistently raise their rates...low risk there too

you always have to ask yourself what you are paying for those 'guarantees'...
there IS an opportunity cost to it...


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## Lephturn (Aug 31, 2009)

sprocket1200 said:


> those rates are far lower than the div yield available today. just go get some good yielding div stocks that consistently raise their rates...low risk there too
> 
> you always have to ask yourself what you are paying for those 'guarantees'...
> there IS an opportunity cost to it...


I hope you hadn't put your money aside in good dividend paying Canadian bank stocks for a new roof in the fall of 08.  Dividend stocks are still stocks, and are nowhere near the liquidity or certainty of a GIC.

Certainly be aware of the opportunity costs, but you can't substitute dividend paying stocks for a fixed income instrument like a GIC.


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## Y&T2010 (Dec 29, 2009)

Hmm I find that the High Interest Savings Accounts are offering more interest than GIC's these days (unless of course you hold it for 3+ years, where you're basically losing money to inflation). I prefer to use the HISA's because I can always withdraw money without having to pay a penalty.


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## sprocket1200 (Aug 21, 2009)

Lephturn said:


> I hope you hadn't put your money aside in good dividend paying Canadian bank stocks for a new roof in the fall of 08.  Dividend stocks are still stocks, and are nowhere near the liquidity or certainty of a GIC.
> 
> Certainly be aware of the opportunity costs, but you can't substitute dividend paying stocks for a fixed income instrument like a GIC.


about liquidity, most stock are nowhere near the liquidity of GIC, you can buy or sell them any day. GIC's can be locked in for the term, and by breaking this term, you would lose most of any interest earned.

as for certainty, I agree, GIC are more certain. in fact, so certain, send me a PM and I will match any bank GIC for any term and rate you can find from the Canadian big five. They take this money and turn around and make much more from it. you could be doing the same thing....


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