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The Basics of GIC Laddering

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While GICs are available for a variety of terms — ranging from a few months to many years — most investors are interested in longer terms, because they offer relatively higher interest rates. Generally speaking (though not always), the longer the term, the higher the rate.

However, there are two risks of purchasing a longer-term GIC — e.g. 3 or more years — that some people are concerned with.

Risk #1: Funds are Locked-In

The first risk is that unless the GIC is cashable — and virtually all longer-term GICs with attractive rates are fixed instead of cashable — investors won’t have access to their money “just in case” they need it. For example, they may unexpectedly have to cover home repairs, replace their car, cover bills in the event of job loss, and so on. Or on the brighter side, they may want to take a vacation, renovate a basement apartment, and so on.

Risk #2: Interest Rates May Go Up

The second risk is based in on the fact that interest rates fluctuate due to a variety of factors, such as decisions made by the Bank of Canada, and the borrowing needs of individual financial institutions. Sometimes, an event that happens on the other side of the world can indirectly push interest rates higher or lower here in Canada.

If rates go down during the term of their GIC, then investors are in the winner’s circle. Everyone else who buys a new GIC will get the lower rate, while they enjoy the higher one. But what if rates go up? Investors with a term GIC won’t benefit from the new higher rate as they are locked in.

Fortunately, there’s a very simple strategy to mitigate both of these risks, and it’s called laddering.

Laddering to the Rescue!

Laddering involves purchasing two or more GICs with various terms, so they mature at different times. The advantage of doing this is that investors get access to a portion of their money, and can decide to spend some/all of it, or purchase a new GIC and get the best rate possible at that time.

Scenario: Meet Sam

Here’s a scenario that shows how laddering works. Let’s say Sam has $50,000 to invest in GICs. He likes the rate that a financial institution is offering on a 5-year fixed GIC. But he doesn’t like that his money will be tied-up for 5 years, because he might need to make a significant purchase during that period. He also thinks that interest rates might go up within the next few years, and he doesn’t want to be stuck with a lower rate.

Instead of purchasing a 5-year GIC and hoping for the best, Sam wisely decides to use a laddering strategy. As such, he splits his investment amount ($50,000) into 5 equal portions ($10,000 each), and purchases the following in his investment portfolio:

  • A 1-year GIC for $10,000 at 2%
  • A 2-year GIC for $10,000 at 2.25%
  • A 3-year GIC for $10,000 at 2.75%
  • A 4-year GIC for $10,000 at 3%
  • A 5-year GIC for $10,000 at 3.5%

As you can see, each year for the next 5 years, Sam will have access to $10,000 of his money. If he needs to spend some or all of it, he can do so. And if he doesn’t, he can use the cash to purchase a new GIC for any term. If he thinks interest rates will be stable for a while or they’ll go down, he can look towards a longer term (e.g. another 5-year GIC). Or if he thinks rates will go up, he can look towards a shorter term, and then see what the marketplace has to offer in the near future.

Laddering is Free and Easy

It’s important to note that Sam doesn’t incur any extra costs for using a laddering strategy, and he certainly doesn’t need to be a financial planning wizard (or hire one). One of the best things about laddering is that anyone can do it. It’s so easy.

Plus, Sam doesn’t have to split his money evenly over his investment horizon (we did so in the above scenario just to keep things simple). For instance, he could put $20,000 in a 5-year GIC, and $7,500 in 1, 2, 3 and 4-year GICs. As long as each individual GIC purchase amount meets the financial institutions minimum investment requirement, Sam can do whatever makes sense to him.

And of course, Sam can — and probably should — invest in different financial institutions, since it’s not usually the case that the institution offering the best 1-year rate also has the best 2, 3, 4 and 5-year rates.

Learn More About Laddering

If there’s anything potentially confusing and complicated about GIC laddering, its that some investors might not know where to get the best rates. They typically know what their familiar bank or credit union is offering, and maybe a few others through searching the web. But there are hundreds of banks, credit unions and caisse populaires across Canada that offer GICs, along with private financial firms and insurance companies.

At the same time, investors may want to diversify their GICs by purchasing them from multiple financial institutions, in order to stay within limits per the prevailing insurance body (e.g. CDIC, DICO, provincial corporations or Assuris).

The answer to both of these issues is simple: contact GIC Wealth Management! We will help you develop and implement a laddering strategy that gets you the most return for your money, while aligning with your unique needs and goals. Plus, our service is offered to you for FREE. We are paid directly by the GIC issuer if and when you choose to purchase your GICs. You never pay us a cent.

To learn more, contact us today. We’ll show you how to make GIC laddering work for you!

The Bank of Canada today maintained its target for the overnight rate at 1 ¼ per cent. The Bank Rate is correspondingly 1 ½ per cent and the deposit rate is 1 per cent.

Inflation in Canada is close to 2 per cent as temporary factors that have been weighing on inflation have largely dissipated, as expected. Consistent with an economy operating with little slack, core measures of inflation have continued to edge up and are all now close to 2 per cent. The transitory impact of higher gasoline prices and recent minimum wage increases will likely cause inflation in 2018 to be modestly higher than the Bank expected in its January Monetary Policy Report (MPR), returning to the 2 per cent target for the rest of the projection horizon.

To read full article please click on the link below:

https://www.bankofcanada.ca/2018/04/fad-press-release-2018-04-18/

A federal agency has stripped away any remaining pretense that banks are trustworthy providers of advice, assistance, guidance, help or anything else along those lines.

The Financial Consumer Agency of Canada said in a report issued Tuesday that the corporate culture at the Big Six banks is sharply focused on selling products and services, and that there are insufficient controls in place to protect clients from aggressive sales practices.

To read full article click on the link below:
https://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/the-big-six-banks-will-fleece-you-if-you-let-them/article38312949/?cmpid=rss1

Here at GIC Wealth Management, we often receive questions regarding depositor insurance. Naturally, investors want to know whether their money will be safe “just in case” an institution fails.

To help you better understand how depositor insurance in Canada works, here is a simple and straightforward overview:

What is depositor insurance?

Depositor insurance protects you against the loss, in whole or in part, of deposits made at member institutions in the event that they fail.

Do financial institutions routinely fail?

No. Canada has a fundamentally strong banking infrastructure, and institutional failures are rare. However, it is nevertheless a remote possibility, which is why depositor insurance exists.

What financial institutions offer depositor insurance?

Hundreds of banks, trust companies, loan companies, insurance companies, credit unions and caisses populaires across Canada offer depositor insurance.

Is all depositor insurance the same?

No. Basically, there are four types of deposit insurance that you should be familiar with:

• Coverage provided by the Canada Deposit Insurance Corporation (CDIC), which is a federal Crown corporation.
• Coverage provided by the Deposit Insurance Corporation of Ontario (DICO), which is an Ontario provincial agency.
• Coverage provided by Assuris, which is a non-profit organization under Canadian Federal regulation to protect policyholders in the event that a life insurer should become insolvent.
• Coverage provided by private corporations in various provinces (e.g. the Deposit Guarantee Corporation of Manitoba), which are mandated to ensure that credit unions and caisses populaires operate under sound business practices, and follow transparency rules regarding reporting, auditing, compliance, and so on.

What depositor insurance is the “best”?

This question triggers considerable debate. Many people believe that CDIC and DICO protection are the “safest,” because they are backed by government (federal for CDIC, and provincial for DICO).

Naturally, any investment backed by the government is going to be safe. But this doesn’t mean that
investments backed by private provincial corporations and Assuris, respectively, are risky and exposed — because they are not.

To date, no member of a credit union or caisses populaires has lost a cent (of covered/insured funds) because of a failure — which itself is a rare occurrence. In virtually all cases, institutions in distress merge with a larger entity, which results in no negative impact to members (in fact, they often benefit from additional products and services).

And in the history of Assuris, only four insurance companies have failed — resulting in zero losses to Assuris-covered customers.

In our view, the short answer to which is the best protection is: all of them, because they all work together to ensure consumer confidence.

What is covered through depositor insurance?

The four types of depositor insurance noted above (CDIC, DICO and corporation-backed) offer different levels of protection.

CDIC insures eligible deposits for up to $100,000, including GICs with terms of five years or less. To see what’s covered by CDIC, visit: http://www.cdic.ca

DICO insures eligible deposits for up to $250,000 (this increased from $100,000 on January 1, 2018), including GICs for any term length. To see what’s covered by DICO, visit: https://www.dico.com

Assuris guarantees all policy holders that if their life insurance company fails, your accumulation annuity (or deposit product, GIC), will be transferred to a solvent company, retaining 100% of the value up to $100,000. To see what’s covered by Assuris, visit: http://www.assuris.ca.

Corporations in other provinces offer different levels of depositor insurance, with some offering unlimited coverage. Click below to learn more about each program:

Who pays for depositor insurance?

Financial institutions pay for depositor insurance (and in the case of Assuris, insurance companies pay). Protection is automatically provided on eligible deposits/policies. You do not have to apply for it separately.

How do I ensure that my deposits are fully covered?

Your deposits will be covered if they are within eligible limits imposed by the respective depositor insurance program (CDIC, DICO, private corporation, Assuris).

How can GIC Wealth Management help me?

Ensuring that all of your deposits are fully covered can be easier said than done; especially if you are making several GIC investments.

At GIC Wealth Management, we will clearly map out your GIC investment options to help you get the insurance coverage you want and need. This may involve purchasing several GICs from multiple financial institutions, or if you wish, looking at options in other provinces.

Also keep in mind that our service is offered to you at no cost. We do not charge for our consulting, or for handling all of the details for your GIC purchase. We are registered brokers, which means that we are paid directly by GIC issuers.

Learn More

To learn more, contact us today toll free at 1-866-2-BUY-GICs (228-9442), or email us through our website here. We’ll respond to you promptly and look forward to answering all of your depositor insurance (and other) questions clearly and thoroughly. Our experience is your advantage.

We all know that when a great offer seems “too good to be true,” that it often is — and reading the fine print before we sign on the dotted line protects us from making a bad decision, and suffering from a case of buyer’s remorse.

However, there are also times when a great offer is simply that: a great offer. There are no catches or strings, and moving forward is safe and smart. And one such scenario is using GIC Wealth Management to purchase your GICs.
Of course, you shouldn’t take our (or anyone else’s) word for this. There are three logical reasons why we offer higher GIC rates than banks and credit unions:

1. Lower Overhead Equals Higher Rates

Unlike banks and credit unions, we don’t have to maintain an expensive branch network. As a result, we pass the savings to our customers in the form of higher interest rates. In other words: we don’t need to make as much profit per sale to cover overhead and staffing costs. Plus, we’re paid directly by the GIC issuer, why is why our clients don’t pay us a cent.

Speaking of GIC issuers: one of the first things we tell our prospective clients is that we don’t issue GICs. We are brokers. That’s why our clients make their payments to the GIC issuer — not to us.

2. We Have Access to Smaller and Lesser-Known Institutions that Pay Higher Rates

While there are dozens of banks and around 700 credit unions and caisses populaires across Canada, most people would probably struggle to name 10. What’s more, they typically have accounts or other products with one or two. We have access to a vast nationwide network of smaller and lesser-known government regulated financial institutions that offer higher rates, and who rely on brokers like us to find new clients.

Plus, these financial institutions insure deposits (up to eligible amounts) via CDIC, DICO, or their respective province’s program if they’re outside of Ontario.

3. We Don’t Use Dynamic Pricing

Dynamic pricing is essentially when the cost of something — whether it’s a flight, car or tickets to a hockey game — changes from customer to customer. Businesses love dynamic pricing, but most customers hate it, since it means they might pay more for the exact same thing compared to someone else.

This is important to note, because banks and credit unions often use dynamic pricing when they sell GICs. This means some clients get lower rates than others — sometimes because they don’t have significant deposits (e.g. RRSPs, TFSAs, etc.), and sometimes because they simply don’t know that negotiating is an option. They accept the posted rate, the same way that they accept the sticker price on an item at the grocery store.

Simply put: we don’t engage in dynamic pricing. Every client gets the highest possible rate (or rates if they purchase multiple GICs), and there is never any worry that someone else might have negotiated a better deal.

Another Advantage: Value Added Service

In addition to getting higher rates, there is another key reason why many people choose GIC Wealth Management to purchase their GICs: to get value added service and support that many banks and credit unions don’t provide — especially when employees often try to push clients towards purchasing mutual funds, and away from GICs. As noted by the Globe and Mail’s Robert Carrick: “Beyond higher rates than the big banks, the benefit of dealing with a deposit broker is the service of having someone handle all the paper work for you while ensuring you stay onside with deposit insurance rules.”

What’s more, all of our value added services are offered to clients for free. We don’t charge a cent. As noted above, we’re paid directly by GIC issuers.

The Bottom Line

Some offers are indeed too good to be true. But others are straightforward and safe. The above reasons explain how and why we offer higher rates and better service than banks and credit unions. Frankly, the only regret that our clients have is that they didn’t find us sooner!

Learn More

To learn more, contact us today toll free at 1-866-2-BUY-GICs (228-9442), or email us through our website here. We’ll respond to you promptly, and look forward to answering all of your questions clearly and thoroughly — whether you are a seasoned GIC investor, or are making your first purchase. Our experience is your advantage.