Are GIC and term deposit interest rates fixed, or do they vary?

Question

If I buy a 1 year GIC (term deposit) at 1.75%, and two months later, the rate changes to 1.5%, am I still locked in the original interest rate of 1.75%? Or will the bank pay 1.75% for the first 2 months and 1.5% for the next 10 months?

Answer 1

It depends on the contract terms of your specific GIC or term deposit.

Some GICs and deposits are fixed rate, which offer a guaranteed interest rate, and some are floating rate or interest-linked, where the interest rate varies according to some benchmark that periodically changes, such as the bank's prime rate.

Each of fixed or floating could be better than the other under circumstances which become evident in hindsight.

If you buy a fixed rate GIC, you are taking a risk locking up your money at that rate. If rates were to rise to higher than your fixed rate, you wouldn't be able to take advantage of the higher rate until your term is up, unless your GIC is redeemable.

If you buy a floating rate GIC, you are taking the risk that your money might have been better invested at a higher fixed rate, should floating rates remain lower over the investment's term, unless your GIC is redeemable.

So, you should also understand whether your GIC is locked in for the entire term, or whether it may be redeemable, and under what conditions, and whether any penalties may apply if you do redeem early. Typically, non-redeemable GICs offer higher interest rates than redeemable GICs.