I noticed on a chat board recently that some people do not understand how GICs work. They wanted to know if they could cash their GIC at any time to pay a bill, buy a car, or re-invest somewhere else at a better rate. In short, they wanted to cash their GIC before it matured.
How Do GICs Work? What Is Agreed Between the Issuer and the Buyer?
True Guaranteed Investment Certificates are not bank accounts or cashable term deposits. The issuer is selling the buyer a guaranteed return of their money plus the agreed on interest at the maturity date.
For example, a bank might sell a client a $2000 GIC with an interest rate of 2.3% per year that matures in 2 years. That 2.3% interest rate is higher than what the buyer could earn by putting the money in a bank account or a cashable term deposit at that specific time.
These standard, regular or true GICs cannot be cashed before they mature. You’re agreeing to lock in the money for the term to maturity.
What if Interest Rates Change After Buying a GIC?
If interest rates drift lower, the GIC buyer has guaranteed a good interest rate for two years. If interest rates rise, however, the buyer has locked in their money for the term to maturity at what may now be a lower interest rate. In the first case, it’s great! In the second case, it’s tough.
Standard GICs Cannot be Cashed without the Consent of the Issuer
A regular GIC is a fixed term contract. It cannot be cashed. You can’t get your money out before the maturity date, even if the interest rates have changed, or you have lost your job, or you want to get married.
The President’s Choice Financial “Must Have” GIC is an example of this. It clearly states that the GIC is “non-redeemable and must be held till maturity.” (http://www.banking.pcfinancial.ca/a/products/gic.page?region=ON&language=en&signinop=OB)
You Don’t Have to Buy a Standard GIC
If you aren’t sure whether you will need the money early, consider alternative types of investments. ING Direct GICs are all Cashable GICs. If you need to cash them before maturity, you will get back all of your principal and you may get a small “early redemption interest” payment as well depending on how quickly you cash it after buying it.
Most banks offer some type of GIC that can be cashed. These GICs might not offer the length of time you want to invest for, or may only offer a much lower rate than a regular GIC, or they might limit when you can cash them early, or they might charge a fee for cashing early. You really have to read the details for each product you are interested in.
You Can Cash a GIC Early if the Issuer Agrees
The exception is you can cash a standard GIC early *IF* the issuer agrees.
For example, when we bought our first house, our RRSP investments were in GICs. Some of them were in the middle of the term and not ready to cash. Fortunately, we were getting our mortgage from the same bank that held our RRSP GICs. They readily agreed to let us cash the GICs early, without a penalty, so we could withdraw the money under the Home Buyer’s Plan and use it for a down payment.
Paying a Penalty to Cash a GIC Before It Matures
Some issuers will allow you to cash out a GIC early for a penalty.
- “Extraordinarily nice” institutions might allow you to get your principal back and some of the interest. ING Direct offers this type of GIC.
- “Nice” institutions might give you back your initial cash but not give you any interest. This is not uncommon in the case of a severe unexpected financial problem such as a death.
- “Regular” institutions will not pay you any interest and will penalize you part of your original investment. So if you paid $1000 for your GIC they may only give you less than $1000 back.
Re-Selling a GIC Before It Matures
In theory, what the financial institution does when it cashes a GIC early is it looks for someone to buy it. Usually, they will have to sell the GIC at a discount to get someone to buy it. So if it was a $1000 GIC paying 2% interest at the end of a 1 year term (and therefore worth $1020 when in matures) they may have to sell it for $900 to find someone who will buy it.
Only GICs which are transferrable and assignable can be re-sold. Most standard, regular, true GICs aren’t.
In general, you can’t re-sell a GIC yourself. The issuer would have to agree to the sale and most won’t.
What Can You Do If You Need Cash and Your GIC Is Locked Up?
You might be able to ask a friend or relative to loan you the money with a written agreement that on the day the GIC matures you will collect the principal and interest and pay them back. Even if they are good friends, you should give them a promissory note in writing, preferably witnessed by a non-friend. That would mean they could easily take you to court and win if you didn’t pay them back. But since you’re going to pay them back, that would be ok, right?
- The 5-year GIC Ladder Strategy: No Longer a Scheme to Maximize GIC Returns
- When Commissions Clash with Customer Service at Banks and Financial Institutions
- RRSP Strategies Part 3: Keep it Safe to Start, Use Cash, Bonds, and GICs to Build Your RRSP Base
- Pros and Cons of Buying GICs in a Self-Directed Online Brokerage Account
Have you ever needed to cash a standard GIC? Were you able to do so? Please share your experiences with a comment.