Rising interest rates bring the GIC down to 5%

We have achieved a major milestone in prudent investing – a 5% return on Guaranteed Investment Certificates.

Oaken Financial, an online financial services player, said it would offer 5% for five years starting Friday. The new rate for the one-year term also seems to mark a step: 4.05%.

Rising interest rates are generally seen as a threat to our finances because they lead to higher costs for mortgages, lines of credit and mortgages. But this year’s rate hikes have also improved returns for savers and conservative investors, thanks in particular to GICs.

“We launched in 2013 and this is the first time we’ve actually been able to offer a GIC that earns 5%,” said Mike Henry, senior vice president of personal banking at Home Trust Co., which is part of the same company. family like Oaken. “And, in fact, we’re pretty sure Canada hasn’t seen such a high GIC rate in over 20 years.”

Oaken’s five-year rate drops from 4.45% to 5%, while the one-year rate drops from 3.75% to 4.05%. Rates for two-, three-, and four-year terms are also up. In the spring of 2021, one- and five-year GIC rates were around 1% and 1.5%, respectively.

Oaken is a subsidiary of Home Capital Group Inc., a mortgage lender. Deposits with Oaken are covered by the Canada Deposit Insurance Corporation through related companies Home Trust and Home Bank.

Oaken’s 5 percent rate not only reflects rising interest rates, but also intense competition among alternative financial institutions trying to attract deposits that can be used for mortgages. Henry said demand for mortgages remains strong among his company’s core customer base of business owners and new Canadians.

A 5% return may not seem like much by the standards set by stock markets in 2021, when double-digit returns were common. But stocks and bonds fell sharply in 2022 and rattled even conservatively diversified portfolios.

A 5% guarantee might be enough to appeal to a wider range of investors than those who prioritize security. Return projections created for financial planners suggest that a portfolio holding 60% stocks and 40% bonds will return an average of 5.4% per year over the next 10+ years before fees. Compared to GICs, stocks and bonds will offer a lot more drama over the years.

With 7.7% inflation in May, a 5% return leaves you with a negative real rate of return. But that would change when inflation began to decline in response to rising rates.

GIC dealers have already reported an increase in demand this year compared to 2021. Rising rates are history, but so is the dismal performance of bonds as a stabilizing force in investment portfolios. ‘investment. Unlike bonds, the price of GICs does not fall when interest rates rise and affect the value of your investment account.

Don’t cancel bonds because of disappointing returns this year. Bonds will recover their price when rates fall and they offer better liquidity than GICs. Your broker can easily sell a bond for you, but GICs are usually locked in and can only be sold before maturity with a severe penalty, if at all. Cashable GICs are available, but at lower rates.

Oaken customers should deal directly with the company. Don’t expect to find the Company’s GICs sold through online brokers or deposit brokers.

Are you a young Canadian with money on your mind? To set you up for success and avoid costly mistakes, listen to our award-winning Stress Test podcast.

Comments are closed.