Long-term GICs vs. short-term GICs: which one’s right for you?

Someone at a party recommended them. Your neighbour puts a lot of money into them. Even your uncle, who calls the stock market "too risky," swears by them. But Guaranteed Investment Certificates (GICs), called Guaranteed Investments at Tangerine, are a safe, convenient way to earn interest on your money. 

Some people like to think of a GIC as a locked-in savings account, meaning it's a secure place to park your money, but—generally speaking—you can’t make a withdrawal until the term is up (more on that later). 

GICs come in varying term lengths that can suit different savings goals. Let's explore the differences between short-term and long-term GICs to choose the best investment for you.

What's a GIC and how does it work?

A GIC is a secure investment that guarantees the money you put in (the principal) plus the interest you earn. At the end of a set period of time, or term, you get back your principal plus interest. 

Many Canadians use GICs as a savings tool, including those who need to put cash away to access at a future date, conservative investors and investors looking to diversify with less speculative investments. (Some institutions offer higher-risk GICs, like market-linked GICs, variable-rate GICs and others, so make sure you research before buying.) 

Typically, interest is calculated daily and may be paid monthly, annually, or at maturity, depending on the GIC’s terms and conditions. Terms can range anywhere from 30 days to 10 years. At Tangerine, term lengths go from 90 days to five years. Typically, the longer the term, the higher the interest rate. 

Want to know more? Read our beginner’s guide to GICs.

What are short-term GICs?

Short-term GICs typically mature in 30 days to one year, and the interest is often less than you would get with a long-term GIC. These GICs are more liquid, since they mature sooner and don't lock away funds for as long.

Advantages of a short-term GIC

The main benefits of short-term GICs include:

• Flexibility: A GIC is a temporary spot to park your cash while potentially earning a higher interest rate than a savings account would pay. Once the term is up, you have the flexibility to do what you want with that money—invest, spend, save, etc.
• Access your money sooner: Unlike longer-term investments, the money is returned relatively quickly, based on the term you choose. If you know that you'll be needing that money in under a year, a short-term GIC gives you access as needed.

Disadvantages of a short-term GIC

The main drawbacks of short-term GICs include:

• Lower returns: The return might be lower compared to other investment options, such as long-term GICs and riskier assets. 
• Might not beat inflation over time: Although the Bank of Canada aims to keep inflation between 1% and 3%, sometimes it goes higher. There's no guarantee GICs will pay more than inflation.

Is a short-term GIC worth it?

Short-term GICs may be worth it for Canadians with short-to medium-term savings goals, such as going on a trip, paying tuition, or making purchases. Some GICs might also be a good place to keep extra emergency fund savings beyond what you would need immediately accessible. Short-term GICs might also appeal to newer, more conservative investors who are concerned with making safe investments.

What are long-term GICs?

Long-term GICs have maturity dates of more than a year. They typically offer higher interest rates than short-term GICs, because you loan the financial institution your money for a longer period of time. That also means lower liquidity—your money is locked away for longer.

Advantages of a long-term GIC

The main benefits of long-term GICs include:

• The potential for higher returns than a savings account: If that money is sitting in a savings account, even a high-interest one, its value may erode due to inflation. The typical savings account in Canada, especially ones with hybrid chequing features, can pay less than 1% a year, and that rate will fluctuate.
• Rate security: There are few things guaranteed in life, but your GIC rate is something you can count on. That rate is primarily influenced by the Bank of Canada’s key interest rate, as well as a few other factors. 

Disadvantages of a long-term GIC

The main disadvantage of long-term GICs:

• Less flexibility: Generally speaking, you're locked into a GIC until maturity, so you won't be able to use that money for anything else until time's up on the term. Plus, your rate is locked in until maturity, so you can't switch over to a GIC with a higher rate. 

Is a long-term GIC worth it?

Long-term GICs may be worth it to Canadians with medium- to long-term savings goals, like paying for (currently young) children's post-secondary education, saving up to buy a home or even retirement. If you don’t need access to that cash for a year or longer, consider long-term GICs.

Considerations for choosing the best GIC for you

Now that we've looked at the differences between long-term and short-term GICs, consider the following questions to help you make your decision. 

• What are your short- and long-term financial goals? Are you planning for retirement in 20 years, a new house in 10 years or a trip in 6 months?
• What's your emergency fund situation? Can you access money in a pinch, say if you lose your job, have an unexpected car repair, or your fridge breaks down? Can you still leave three to six months' worth of expenses in your emergency fund if you lock money up for the duration of the GIC term?
• What's your risk tolerance? Are you comfortable with more risky investments, or is a GIC as risky as you'd like to get? Would you sleep better knowing that your money is locked in at a specific rate? How long are you willing to keep money in a GIC?
• How liquid do you want your money to be? Can you afford to lock in your money for that time period? i.e. when will you need that cash?
• What's the interest rate environment? Are rates rising or falling? Does it make sense to lock in your money at the current rate? If so, is that rate attractive enough to lock in for the long term?

Consider laddering your GICs 

You don’t have to put all your eggs in one GIC basket. You can buy multiple GICs with varying terms — this is a strategy called GIC laddering. This strategy allows you to reinvest your money when a GIC matures and take advantage of varying interest rates. Use Tangerine’s GIC calculator to compare rates and terms. 

Real-life scenarios: Choosing the right GIC

Here are some real-life scenarios to explore how GICs might fit into your finances.

Case Study 1: Raj is a 25-year-old saving for his wedding next year. His parents gifted him the venue money, but he wants it to earn interest over the months before the wedding. He chooses a short-term 270-day GIC. A short-term GIC makes sense, because it should offer Raj both growth and access to the money before the big day. 

Case Study 2: Renée is a 48-year-old mom. Every paycheque, she puts aside extra savings for her child’s post-secondary education in 10 years. At the end of each year, she puts that money into a one-year GIC. At maturity, she reinvests everything (interest and all!) into another GIC, and then repeats the process every year. Having some money for school supplies and tuition costs put away in a safe investment gives her peace of mind.

Case Study 3: Mike is a 30-something married father with a toddler. He has multiple savings goals all at once, including buying his first home, saving for his first big family trip, retirement planning and more. This is a busy stage of life. Mike is considering a GIC laddering strategy to help manage all these goals and allow access to the cash when he needs it. 

Choosing the GIC term that’s right for you

The right GIC for you depends on your timeline, comfort with risk and bigger financial picture. Short-term GICs offer access to funds sooner, while long-term GICs may offer better rates. 

GICs can be a great first step in building a stable financial foundation. Tangerine offers GICs with attractive rates that are easy to open online.