The Ultimate Guide to GIC Laddering: Step-by-Step Explanation with Example [Updated 2023]

FINANCE

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GICs are one of the safest investment options in the Canadian markets. However, this safety comes at a price. The GIC investors are exposed to interest rate risk. Once locked in at a rate, they cannot take advantage of the interest rate hikes.

In all such cases, GIC laddering comes to their rescue. It helps you earn better returns on your invested capital. And ultimately, you can earn more. Let us find out what it is.

GIC laddering boosts your returns and eliminates interest rate risk. You get an opportunity to renew your GIC at higher interest rate.

Why Investing in GIC Hurts Common Canadians?

How do the GIC investors suffer? They don’t get to enjoy interest rate hikes. The Bank of Canada keeps increasing and decreasing the overnight rate, which impacts how much you will earn from GICs.

While investing, you will lock in a fixed interest rate and get returns based on it until your GIC matures.
Now, if within this period, the Bank of Canada decides to increase the interest rates – you will lose out on the opportunity to enjoy higher returns.
That’s because you won’t be able to redeem your GICs.
Even when you have opted for redeemable GICs, you get a lower interest rate and must pay fee charges for early redemption.

Indeed, you enjoy the safety of capital and eliminate the risk of losing money by investing in GICs. Thanks to the $100,000 insurance cover offered by CDIC.

But, nobody wants to redeem the GICs early and settle for a lower interest rate. That’s why there is a need to invest your money based on the technique of GIC laddering.

What is GIC Laddering?

This technique is based on “splitting up” your money. Instead of investing all your corpus in one go – you are advised to divide your money into five parts and invest each portion into multiple GICs.

For Example, if you want to invest $25,000 in GICs – you must invest $5,000 in five different GICs, having different maturity periods of 1, 2, 3, 4, and 5 years.

How does this help?

You will have maturity every year.
You can re-invest this amount at the prevailing rates.
This helps you to take advantage of the interest rate hikes
You can also choose not to re-invest and use the maturity proceeds for other purposes
You are not required to redeem your GICs before the maturity

Step-By-Step Guide to GIC Laddering

You can make a GIC ladder in three easy steps. These are:

Steps	What to do?
I: Division of Money	Whatever you want to invest – divide it into five equal parts This could be five years, five periods of 6 months, or maybe simply five months Your choice of time will depend on how frequently you want money
II: Invest in five different GICs with different maturity periods/terms	Each portion of the money must be invested in five different GICs having different terms For example, Portion I invested in GIC with a tenure of 5 years Portion II invested in GIC with a tenure of 4 years Portion III invested in GIC with a tenure of 3 years Portion IV invested in GIC with a tenure of 2 years Portion V invested in GIC with a tenure of 1 year
III: Re-invest the Proceeds	This way, a ladder will be created, and you will get money every year (or any frequency that you have chosen) Re-invest the proceeds in a new GIC on maturity Choose the maximum term of the frequency you have chosen. For example, every time re-invest the proceeds in a 5-year GIC.

Example of GIC Laddering

Particulars	Amount
Money to be invested	$30,000
Laddering Period	5 years
Investment Product	GIC (Guaranteed Investment Certificate)

How to invest?

Divide $30,000 into five equal parts of $6,000 each
Invest in 1, 2, 3, 4, and 5-year GICs
Re-invest the maturity amount in a new 5-year GIC
This way – you will keep getting the proceeds every year, besides getting an opportunity to invest at a higher interest rate

The Schedule of Investment

Initial Investment	Today	Year 1	Year 2	Year 3	Year 4	Year 5
$6,000	Purchase 1-year GIC @ 2%	Purchase 5-year maturity at 4%	–	–	–	–
$6,000	Purchase 2-year GIC @ 2.5%	–	Purchase 5-year maturity at 4%	–	–	–
$6,000	Purchase 3-year GIC @ 3%	–	–	Purchase 5-year maturity at 4%	–	–
$6,000	Purchase 4-year GIC @ 3.5%	–	–	–	Purchase 5-year maturity at 4%	–
$6,000	Purchase 5-year GIC @ 4%	–	–	–	–	Purchase 5-year maturity at 4%

What will happen?

Every year you will get a maturity (principal amount with interest)
You will re-invest the proceeds in a new 5-year GIC
This will help you lock in GICs at the current interest rates thereby reducing your interest rate risk

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