The Basics of GIC Laddering - GIC Wealth Management


FYI/Blog The Basics of GIC Laddering

The Basics of GIC Laddering

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!