The question of just what stocks you’re 'investing' in with your GIC purchase is one of many you need to ask before buying in to the products.Getty Images/iStockphoto
Interest rates are going up, but savers are not benefiting.
The Bank of Canada raised its key rate by a quarter percentage point, to 1.25 per cent, earlier this month, the third rate hike in the past year. Even before that announcement, our Big Six banks jumped the gun by hiking their fixed-term mortgage rates by an average of 15 basis points, to 5.14 per cent in most cases.
That means more pain for borrowers, but guess what? Investors in guaranteed investment certificates aren't going along for the ride. The online posted rate on an RBC non-redeemable GIC remains stuck at 1.6 per cent, where it has been for months. You'll get the same offer from Toronto-Dominion Bank and National Bank. Bank of Montreal is even stingier, at 1.5 per cent, and you'll receive only 1.25 per cent from CIBC.
The best deal I could find among the Big Six is Scotiabank's current offer of a five-year "special rate" GIC at 2.6 per cent. I don't know how long that deal will last, as it is way out of line with its competitors, so if you're looking to invest some money in these safe securities (which are covered by deposit insurance up to $100,000), you might want to explore this more. (Update: CIBC also has a five-year non-redeemable "special rate" GIC being offered at 2.45 per cent, as of Jan. 26.)
You can get higher rates from some of the smaller financial institutions – for instance, Home Capital Group Inc.'s Oaken Financial just raised their five-year rate to 3.25 per cent. But many people prefer to deal with the big names when it comes to their money.
So why are the major banks so reluctant to pass on interest rate increases to their depositors? One word: profit. The banks earn a large percentage of their income on the spread between the rates they charge on loans and the amounts they pay on deposits, GICs and the like. This is known as the net interest margin, or NIM.
Despite record earnings, their loan profits have been squeezed during the long period of low rates from which we are now emerging. They're going to take advantage of the rate recovery by increasing their NIMs for as long as they can. But competitive forces could force the laggards to start moving up their GIC rates sooner rather than later. Scotiabank's special rate offer means a yield that is more than twice that of the CIBC posted rate. If you invest $10,000 for a year at 2.6 per cent, you'll earn $260. At 1.25 per cent you'll receive $125.
I expect to see the other big banks come out with special offers soon, so my advice is to shop around. Sometimes these deals are available only for a short time, as a bank looks to build market share. So before you invest, take a few minutes to check for current offerings.
Ratehub.ca is a good place to start, although they may not be up to the minute on the latest specials (for instance, I couldn't find anything there about the newest Scotiabank offer at the time I checked). So also visit the bank websites and ask at your branch if there are any special rates for clients.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to buildingwealth.ca.
Gordon Pape