A non-redeemable GIC is a type of investment product – specifically, a type of GIC (guaranteed investment certificate) – that can’t be redeemed or cashed in until its agreed maturity date.
GICs are low-risk investments. You essentially agree to loan money to a bank for an amount of time and the bank agrees to pay you back your loan plus a pre-detremined rate of interest.
Some GICs are considered redeemable, or cashable, meaning you can cash them in and get your money out before the maturity date. But we’re talking about the non-redeemable kind here. With non-redeemable GICs, you agree to lock your money in for a fixed term.
Understanding Non-Redeemable GICs
You buy a GIC from a bank or financial institution. They’re considered one of the safest investment products because you’re guaranteed to get your principle (your initial investment) back, plus most GICs are insured by Canada Deposit Insurance Corporation (CDIC), a federal agency, or by the province where the GIC was bought.
When you buy a GIC, you agree on the terms from the outset. Before you sign over your investment, you know how much you’re investing, the length of the term, and the interest rate you’ll earn. Some GICs has fixed interest rates, so you know exactly what you’ll receive when the GIC reaches its maturity date. Or you can opt for GICs that have variable rates or that are tied to the stock market, meaning the interest you earn will depend on external factors (which could mean you earn much more or much less than a fixed-rate GIC).
Typically with GICs, there’s a $500 minimum investment and a minimum period of 30 days. Terms can range from one month up to 10 years.
Non-redeemable GICs are considered “locked in”. Generally, you can’t pull your money out of a non-redeemable GIC without being penalized for doing so (it’s at the discretion of the bank if they will even let you break the agreement). Because they’re locked in, non-redeemable GICs offer better returns than redeemable GICs (which allow you to pull your money out at any time but have worse rates).
Most GICs can also be registered with the Canadian federal government, meaning you can buy one within your tax-free savings account (TFSA) or your registered retirement savings plan (RRSP) and you won’t pay tax on the interest your GIC earns.
A low-risk investment
As far as investments go, you can’t get much lower risk that GICs. You’re guaranteed to get back your principle and not too many investment product can promise that. GICs more or less function like a savings account – you put aside some money and grow interest on it. And, because the vast majority of GICs are insured, even if your bank went bankrupt, you’d still get your money.
GICs with fixed rates offer predictable, stable rates of return. You know exactly how much you’ll get back when your investment matures because the rates remain the same no matter what happens to the market. If your GIC is fixed-rate – not variable-rate or market-linked – you don’t need to concern yourself with any outside volatility.
How Non-Redeemable GICs Work
When you buy a non-redeemable GIC, you basically agree to loan money to a bank for a predetermined period and you agree not to take your money back out (redeem it) until the conclusion of the term. The bank uses your money to loan to other customers at a higher interest rate than they’re going to give back to you.
An example of how a GIC works would be if you agreed to a one-year non-redeemable GIC with a bank, with the agreement you’ll receive back 4 percent interest on your principle. The bank then takes your investment and loans it out to someone else at a higher interest rate – say, 8 percent interest. That way the bank can afford to guarantee your return because they know they’ll be making money too.
Whether you buy a one-month or a one-year or a five-year non-redeemable GIC, you’re agreeing not to cash out your investment until that term matures. This is why banks can offer better rates with non-redeemable GICs (as opposed to redeemable GICs) – because they know the money won’t be pulled out early.
Non-redeemable GICs will penalize you for withdrawing your money before the term matures. Some may not even allow you to withdraw. The decision is often at the discretion of the bank.
Determining if a Non-Redeemable GIC is Right for You
How do you know if a non-redeemable GIC is right for you?
A non-redeemable GIC might be right for you if:
You like low-risk, secure and stable investments
You want your principle guaranteed
You are comfortable agreeing to a maturity date and sticking to it
You do not need access to your money in a hurry
A non-redeemable GIC might not be right for you if:
You might need access to your money in a hurry
You prefer the convenience of cashing out your money on a whim
You have a higher tolerance for risk and want to earn more money, even if that means your returns are not guaranteed
Purchasing a Non-Redeemable GIC
You can buy non-redeemable GICs online or in person from most major banks, trust companies, credit unions and caisses populaires. You can also buy GICs through a deposit broker or through online brokerages like Questrade.
Shop around and compare rates and terms, as well as the type of GIC you’re after. It pays to do your research and make sure your non-redeemable GIC options are insured by CDIC, as that gives you added protection. Also note, some GICs are registered and some are not, which impacts whether or not they can be included within your RRSP or TFSA portfolio.
Choosing the Right Non-Redeemable GIC
With a non-redeemable GIC – or any GIC for that matter – you’ve got options. There are different types of GICs that offer different rates, different term lengths, and different minimum purchase prices.
Factors to consider when choosing a non-redeemable GIC
Length of term
GICs can range from 30 days to 10 years. How long do you want to invest your money? When might you need it back? Remember, with non-redeemable GICs, your investment is locked in for the full term (if you’re even able to get it out early, there will be a penalty).
Fixed or variable rate
With a fixed rate, you’re guaranteed the rate you sign up for. These are the safest option. Variable and market-driven rates have more risk but potentially more reward also. If the economy performs well, you could make more money that a fixed rate, but if there’s a downturn you could make no interest at all.
Consider if you want regular payments during the term of the GIC or if you’d rather get it all at the end. Different GICs have options to pay interest out monthly, every three months, every six months, annually, or at maturity.
How much do you want to tie up in your GIC? Different banks and financial institutions have different minimum investments for buying GICs. Some are as low as $100 and can be as high as $5000.
Available Non-Redeemable GIC Options
Short-term Canadian Dollar GICs
As the name suggests, these are for short-term investments. Short-term GICs are for less than a year, usually between 30 and 270 days (1-3 months). As the length is shorter, the offered rates are usually shorter too.
Long-term Canadian Dollar GICs
Long-term GICs are usually offered between 1-10 years. Terms of between 1-5 years are most common. In many instances, the longer the term of a GIC, the better the rates.
US Dollar GICs
You can also buy GICs in foreign currencies, with USD GICs the most common in Canada. In 2020, CDIC insurance was extended to include foreign currency GICs, meaning these are protected as well. Adding a USD GIC to your portfolio diversifies your portfolio and means you could benefit from a strong US Dollar, even if the Canadian Dollar dips.
Sam Boyer spends, invests, budgets, and writes. He enjoys writing about things he wishes he’d learned earlier — like spending, investing, and budgeting. A journalist originally from New Zealand, Sam has written extensively about consumer affairs, insurance, travel, health, and crime.