How to Build a GIC Ladder

Ratehub.ca
by Ratehub.ca November 6, 2018 / 5 Comments

When many people think about buying a GIC, they tend to think in terms of investing a lump sum into one GIC. With this kind of approach, all the money is tied up in the investment until it matures (unless it’s a cashable GIC, of course). Why isn’t this an ideal strategy?

For one thing, if you put all of your savings into a longer-term GIC (such as 5 years), it means that you may not have enough cash on hand if you end up needing funds for something, whether it be a new car or home renovations.

In addition, locking all your money up in a longer-term GIC will deprive you of the chance to benefit if interest rates happen to rise before your GIC matures.

Because of the above considerations, you may want to consider a strategy known as GIC laddering.

Just as a ladder has many different rungs, a GIC ladder also does, figuratively speaking. Creating a GIC ladder simply involves dividing your total GIC investment among different maturities.

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For example, let’s say you have $25,000 that you wish to put into GICs. A classic GIC ladder would divide the $25,000 by five and put the money into 1-year, 2-year, 3-year, 4-year, and 5-year GICs. As with all GICs, you’d want to find the best rate for each maturity to maximize your income.

This is only the initial step, however. At the end of the first year, the 1-year GIC will mature. By this point, the remaining GICs will mature in 1, 2, 3 and 4 years. Assuming you don’t need the money from the first maturing GIC, you can then reinvest the $5,000 (plus the interest) into another 5-year GIC.

Given that your first 5-year GIC is effectively a 4-year GIC after one year, buying another 5-year GIC keeps the maturity profile constant.

So how does this look in practice?

If you compare GIC rates on Ratehub.ca, you’ll find the best rates for 1-, 2-, 3-, 4-, and 5-year non-redeemable GICs. As of November 6, they are:

  • 1-year: 3.10%
  • 2-year: 3.30%
  • 3-year: 3.40%
  • 4-year: 3.40%
  • 5-year: 3.60%

Assuming you make a $25,000 investment, here’s how the ladder will fare in the first year:

GIC maturity/interest rate Amount invested Interest earned
1-year @ 3.10% $5,000 $155
2-year @ 3.30% $5,000 $330
3-year @ 3.40% $5,000 $510
4-year @ 3.20% $5,000 $680
5-year @ 3.60% $5,000 $900
Total $25,000 $2,575

After the first year, you’ll receive $5,155 from the 1-year GIC ($5,000 in principal plus $1155 in interest). Let’s say interest rates on 5-year GICs have gone up in the interim, to 3.75%. You can then use the money to buy another 5-year GIC at the higher rate. This keeps the ladder intact, with maturities from 1 to 5 years, and you get to take advantage of the higher rate.

Interested in creating a GIC ladder? Check out our page with the best GIC rates in Canada.

Flickr: KMR Photography


  • William McIntyre

    How do you handle the interest from the GICs that have not matured?

    • Ratehub

      Hi William,

      Thanks for your questions. Just to clarify: Are you asking about re-investing interest in GICs that have not yet matured?

      • William McIntyre

        Yes…After one year, how should you reinvest the interest from the 2,3,4 & 5 year GICs. IE: all into the new 5 year GIC or just let each GIC compound?

        • Ratehub

          There are several options. One is to keep the ladder intact. After the first year, you will have earned interest on your 1 year GIC. You will also be left with your original 2,3,4, and 5 year GICs (which would then be 1,2,3, and 4 year GICs). You could then take that principal (plus interest) and re-invest it in an additional 5-year GIC to keep the ladder going.

          • William McIntyre

            I see two practical approaches. In a rising interest rate environment as we are in now, the pure laddering (auto-pilot) approach would produce the best long term result. If rates are steady or falling, reinvesting the interest from all of the GICs into the new 5 year GIC would produce the most income. The risk being that your forecast of the direction of interest rates is wrong.