Rising interest rates have brought back the 5 per cent GIC

We’ve hit a milestone in conservative investing – a 5 per cent return from guaranteed investment certificates.

Oaken Financial, an online player in financial services, says it will offer 5 per cent for a five-year term starting Friday. The new rate for the one-year term seems a milestone as well: 4.05 per cent.

Rising interest rates are generally seen as a threat to our finances because they mean higher costs for mortgages, lines of credit and mortgages. But this year’s rate hikes have also improved returns for savers and conservative investors, most notably through GICs.

“We launched in 2013 and this is the first time that we’re actually able to offer a GIC that’s paying 5 per cent,” said Mike Henry, executive vice-president of consumer banking at Home Trust Co., part of the same corporate family as Oaken. “And, in fact, we’re pretty sure that Canada hasn’t seen a GIC rate this high in over 20 years.”

Oaken’s five-year rate jumps to 5 per cent from 4.45 per cent, while the one-year rate improves to 4.05 per cent from 3.75 per cent. Rates for terms of two, three and four years are also up. In spring 2021, one- and five-year GIC rates were around 1 and 1.5 per cent, respectively.

Oaken is a subsidiary of Home Capital Group Inc., a mortgage lender. Deposits with Oaken are covered by Canada Deposit Insurance Corp. through related companies Home Trust and Home Bank.

The 5 per cent rate from Oaken reflects not only rising interest rates, but also intense competition between alternative financial institutions trying to attract deposits than can be used for mortgage lending. Mr. Henry said demand for mortgages remains strong in his company’s core client base of business owners and new Canadians.

A return of 5 per cent may not sound like much by the standards set by the stock markets in 2021, when double-digit returns were common. But both stocks and bonds have fallen hard in 2022 and rocked even conservatively diversified portfolios.

A guaranteed 5 per cent might be enough to interest a broader swathe of investors than those who put safety first. Return projections created for financial planners to use suggest a portfolio holding 60 per cent stocks and 40 per cent bonds will make an average annual 5.4 per cent over the next 10-plus years before fees. Compared with GICs, stocks and bonds will deliver a lot more drama through the years.

With inflation running at 7.7 per cent in May, a 5 per cent return does leave you with a negative real rate of return. But that would change when inflation starts to decline in response to rising rates.

GIC dealers have already reported a surge in demand this year compared with 2021. Rising rates are part of the story, but so is the dismal performance of bonds as a stabilizing force in investment portfolios. Unlike bonds, GICs don’t fall in price when interest rates rise and hurt the value of your investment account.

Don’t write off bonds because of this year’s disappointing returns. Bonds will snap back in price when rates turn lower, and they offer better liquidity than GICs. Your broker can sell a bond for you easily, but GICs are generally locked in and can only be sold before maturity with a severe penalty, if at all. Cashable GICs are available, but at lower rates.

Oaken clients must deal with the firm directly. Don’t expect to find the company’s GICs sold by online brokers or deposit brokers.

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