GIC rates are rising. That could be a reason not to lock in for five years

Canadian savers finally have 4-per-cent GICs to choose from again. The highest five-year GIC rate has climbed to 4.50 per cent, while the best three-year GIC rate is 4.40 per cent and the best one-year rate is 4.00 per cent.

Even savings accounts have become more competitive, with WealthOne offering Canada’s top standard savings account rate at 3.00 per cent and Manulife also offering 3.00 per cent on new deposits for two years.

Normally, a rising five-year GIC rate makes the decision simple: lock it in before rates fall again.

But what if rates are still rising?

With the Bank of Canada’s policy rate currently at 2.25 per cent, WOWA’s latest market-based interest rate forecast has it rising to 2.50 per cent around the beginning of 2027, 3.25 per cent by mid-year and 3.50 per cent by the end of 2027, before reaching 3.75 per cent in 2028.

This creates a problem for savers. Locking in a long-term GIC protects you from rates falling, but it also prevents you from taking advantage if GIC rates rise.

Waiting for higher rates is still a bet

A higher Bank of Canada rate does not automatically mean a five-year GIC will rise by the same amount.

The overnight rate has its strongest effect on shorter-term rates. Longer-term GIC and fixed mortgage rates depend more heavily on expectations for future policy rates and Government of Canada bond yields. If investors already expect Bank of Canada interest rate decisions to result in hikes, some of those increases can already be reflected in today’s GIC rates.

That explains why GIC rates have already moved sharply. Since late July, the best one- and two-year GIC rates have risen 35 basis points, the three-year rate 50 basis points, and the five-year rate 40 basis points

Savers now face a different rate risk

That creates lock-in risk: buy a five-year GIC today, and you could be stuck at a lower rate if rates keep rising. One way to reduce that risk is to divide savings among several GIC maturities.

If interest rates rise as markets currently expect, the shorter-term GICs mature sooner and can potentially be reinvested at higher rates. If today’s forecast turns out to be wrong and rates fall or are limited, the three-year and five-year portions have already locked in today’s relatively high rates.

Don’t ignore savings accounts either

For money that may be needed soon, liquidity by way of a high-interest savings account still matters more than squeezing out every last basis point with a GIC.

The best standard savings rate is currently 3.00 per cent offered by WealthOne. Promotional savings offers reach 5.00 per cent, although the highest promotional rate by BMO lasts only four months before falling to 0.45 per cent.

Interest rates are provided by WOWA.ca, which gathers, aggregates and freely disseminates data on mortgage rates, savings accounts, and GIC rates from 50+ Canadian financial institutions.

Jimmy Nguyen is a writer and content developer at WOWA.ca, a Canadian personal finance platform.