The Deal With HISAs, GICs & Market-Linked GICs

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The Deal With HISAs, GICs & Market-Linked GICs

Thanks to rising interest rates in 2022 to mid-2023 and the overall feeling of financial insecurity, high interest savings accounts, GICs, and market-linked GICs have become more attractive to Canadians. 

Are these good investment options for you? Why or why not? Let’s start with defining each of them.

How Each Product Is Designed

HIGH INTEREST SAVINGS ACCOUNT

A high interest savings account (HISA) is a type of savings account that offers a higher interest rate compared to standard savings accounts. These accounts are typically offered by banks or financial institutions as a way to attract customers and encourage them to save money at very little risk.

The interest rates on high interest savings accounts are variable depending on the Bank of Canada’s key interest rates.

Clients are usually initially attracted to HISAs because of time-sensitive promotional rates. They are intended for those who are risk averse and don’t want their savings invested in the markets, or for short-term goals.

GUARANTEED INVESTMENT CERTIFICATES

GICs, or Guaranteed Investment Certificates, are financial products offered by banks and other financial institutions. They are a type of fixed-term investment where an individual invests a lump sum of money for a specified period at a fixed interest rate. GICs are considered a low-risk investment because they guarantee the return of the principal amount along with the agreed-upon interest at the end of the term.

The key features of GICS are:

  • Fixed terms, typically 1 to 5 year terms
  • Guaranteed returns and considered low-risk
  • Can be redeemable or non-redeemable. Some GICs are redeemable before the maturity date, but this often comes with penalties. Non-redeemable GICs cannot be cashed before maturity without penalties.

While the interest rates with HISAs are variable, GIC interest rates are predetermined beforehand and are guaranteed. Similar to HISAs, GIC rates tend to be lower than other investment options and are geared towards those who are risk averse or for short-term goals.

MARKET-LINKED GICs

Market-linked GICs, also known as indexed GICs, are a type of product that combines elements of both traditional GICs with market-linked investment options. Market-linked GICs provide returns based on the performance of an underlying market index, such as a stock market index.

Here are some key features of market-linked GICSs:

  • Principal protection: Like traditional GICs, your initial investment is guaranteed even if the underlying market index does poorly.
  • Market-linked returns: The interest earned is tied to a market-linked index, similar to index funds. In other words if the the index does well, so does your return.
  • Terms and maturity period: Like traditional GICs, market-linked GICs are available in fixed terms with a maturity date.
  • Cap on returns: On one side your initial investment is guaranteed with market-linked GICs. On the other hand, there is a maximum return an investor can earn no matter how well the linked market index does. This cap is predetermined.

When Should These Options Be Considered

HISAs, GICs, and market-linked GICs are geared towards the risk averse person with a limited time horizon.

They are not recommended for long term investing, as investors will miss out on the potential of higher returns and the impact of compound interest on their investments.

If you have a short term goal – ex. purchasing a home or going on vacation in the near future – HISAs or GICs can be considered depending on your time horizon. Market-linked GICs can be considered for longer time horizons, but other less complicated options are available.

If you are someone who is risk averse, it may be time to start working with an advisor or a financial planner who has the patience to go over investing 101 with you. Otherwise, you are easily leaving money on the table. We fear what we don’t know and for many, the investing is just another foreign world.

Be Careful of Traps

Be prudent of promotional rate HISAs, offering an explosive initial promotional rate only to decrease to extremely low rates. This is what banks and financial institutions are banking on (no pun intended) when they entice new clients with their promotional HISA ads.

When it comes to GICs, be attentive of your maturity date. Clients need to advise their financial institution within 30 days of maturity if they do not wish to renew; otherwise, they will automatically renew. Also if your GIC automatically renews, chances are it will be renewed at a lower rate than what is available on the market.

Approaching Your Own Investments

Investing isn’t all or nothing, and products like HISAs and GICs limit you in the strategy of “making your money work for you”. Investments earmarked for the long-term should be reviewed at least once a year and anytime you are approaching a major life change.

Whether you are working with an advisor or use a self-directed investing platform, you should have a general idea of how your investments are performing. Are they in line with market trends? Are you being tax efficient? What is the exit strategy once you are ready to withdraw? Or, do you blindly turn away?

We work hard for our money and we want our investments to reflect that. If not, it may be time to start looking at your investments more seriously.

Lin Sok is an Independent Financial Security Advisor and Mortgage Broker. For a review of your own investments, you can book a call here.

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