GIC Ladder: A Clever Way to Maximize Your Investment

A GIC ladder staggers the maturity dates of your guaranteed investment certificates so you can take advantage of longer-term interest rates.

Guaranteed investment certificates (GICs) are a popular type of investment because they offer an ensured rate of return and there’s usually no risk of losing money. GICs can be especially attractive when interest rates rise or a recession is on the horizon.

By utilizing a GIC ladder strategy, you can maximize your investment while minimizing one of the GIC’s few downsides: the inability to access your money for prolonged periods of time.

What is the GIC ladder approach?

GIC laddering is an investment technique that allows you to take advantage of the higher interest rates often offered for long-term GICs without locking away all your money at the same time.

Here’s an example to demonstrate how a GIC ladder works.

Let’s say you have $25,000 to invest.

Rather than investing all of your money in one five-year GIC, you’d divide it into $5,000 increments and purchase several separate GICs. Each GIC will have a different term, ranging from one to five years.

Using this strategy, you’ll ensure one of your GICs matures every 12 months. You could roll it over and reinvest for a new five-year term, or if you need the cash, you can reclaim the first $5,000 (plus interest) after a year without paying an early-withdrawal penalty.

Using a GIC ladder to stagger the maturity dates of your GICs yields a win-win-win: guaranteed returns, reasonable access to your money and reduced exposure to the impact of changing interest rates.

How to build a GIC ladder

You can purchase GICs at many traditional financial institutions like banks and credit unions, as well as online banks. The bank’s investment advisor can help you set up a GIC ladder, which may consist of the following steps:

Step 1: Divide your money and buy five GICs

Continuing with our previous example, let’s say you have $25,000 to invest in GICs.

Rather than investing that entire sum into one five-year GIC, you opt to build a GIC ladder by investing $5,000 into each of several GICs with different terms: a one-year GIC, a two-year GIC, a three-year GIC, a four-year GIC, and a five-year GIC.

To demonstrate the benefits of a GIC ladder, imagine your new GICs have the following interest rates:

One-year: 4.50%
Two-year: 4.75%
Three-year: 5.00%
Four-year: 5.10%
Five-year: 5.20%

When you add up these interest rates (they total 24.55%) and divide by the total number of investments you made (five), you get your average annual return for the first year (4.91%).

On its own, the one-year GIC in our example would earn 4.50%, which means the laddering strategy will put you 0.41% ahead.

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Step 2: When your GICs mature, reinvest them

After one year, your first GIC will mature. In this example, your $5,000 investment will have earned 4.50%, for a total of $5,225 at maturity.

At this point, you can reinvest that $5,225 into a five-year GIC, knocking out the 1-year term rung from your ladder and increasing your average return rate.

Assuming the rates in the example stay the same, your total interest will now be 25.25% after adding the following interest rates:

Your new five-year: 5.20%
Two-year: 4.75%
Three-year: 5.00%
Four-year: 5.10%
Five-year: 5.20%

At the end of the second year, your new average return on your investment will be 5.05% (divide 25.25% by your five investments).

You are now 0.14% (5.05% minus 4.91%, your previous average annual) ahead of where you would be if you had just invested all of your money in a one-year GIC and rolled it over a second time.

Step 3: Repeat the process

As each of your one-, two-, three-, four- and five-year GICs mature, you may choose to continue reinvesting them into five-year GICs.

Let’s say that interest rates stay the same over the course of the five years. That means at the beginning of year six, all of your investments will be in five-year term GICs with higher rates of 5.2%.

GIC laddering is meant to be a long-term strategy. You can pull out some of your money as the terms mature, but as you can see, the longer you keep reinvesting, the higher your returns.

Many banks offer free online GIC ladder calculators to help you figure out compound interest for GIC laddering at current rates. You can also create your own spreadsheet to plan your investments.

Here’s a visual representation of a GIC ladder, showing the stepwise effect that inspired its name.

Total investment: $25,000	Today	Year 1	Year 2	Year 3	Year 4	Year 5
$5,000	Buy 1-year GIC	GIC matures, reinvest for 5 years
$5,000	Buy 2-year GIC		GIC matures, reinvest for 5 years
$5,000	Buy 3-year GIC			GIC matures, reinvest for 5 years
$5,000	Buy 4-year GIC				GIC matures, reinvest for 5 years
$5,000	Buy 5-year GIC					GIC matures, reinvest for 5 years

Pros and cons of laddering GICs

Pros

Helps you take advantage of the higher interest rates often offered with longer terms.
Provides more liquidity, since at least one GIC will mature every year and is accessible without penalty.
Offers flexibility as interest rates rise. You can reinvest your mature GICs at a better rate.
Provides peace of mind when interest rates drop; some of your money is already locked in at higher rates.

Cons

GICs don’t always keep up with inflation and may earn lower returns compared to other types of investments, even in a rising interest rate environment.
GIC laddering makes less sense when interest rates start declining and the short-term GIC (terms of less than one year) rates are higher than the longer term deposits.
May receive a lower rate of return on variable rate or market-linked GICs when the market or interest rates dip.

Start by purchasing five GICs with terms of one to five years. As each GIC matures, you reinvest your capital into a 5-year GIC. That way, you can take advantage of the higher interest rates and ensure that one of your GICs continues maturing every year.

GIC interest rates vary depending on the type and the financial institution providing them, so you’ll have to compare the best GIC rates to find the one that can earn you the most on your 5-year investment.

You may consider GIC laddering if you wish to take advantage of rising interest rates on longer-term deposits and have the flexibility to reinvest or withdraw your money after a year without paying a penalty.

About the Authors

Siddhi Bagwe

Siddhi Bagwe is a content management specialist at NerdWallet Canada. Treating content marketing as an educational medium for readers, Siddhi believes in empowering them with the knowledge of personal finance…

Clay Jarvis

Clay Jarvis is NerdWallet’s mortgage and real estate expert in Canada. Thus far, his entire professional writing career has revolved around real estate. Prior to joining NerdWallet, he was the…

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