About the Best Canadian CD Interest Rates

A common piece of money management wisdom is that investment opportunities should be diversified, with riskier options that could lead to high rewards balanced by safer, more conservative options that are unlikely to lose money. One of the safer investments is a certificate of deposit, but it's important to research certificate of deposit rates. Canada has a similar investment concept called a guaranteed investment certificate, with generally similar degrees of reliability and rates of return.

Are you wondering, what is a CD? A certificate of deposit, also known as a CD in the United States, is a very safe investment. Effectively, a CD acts as a loan to the bank for a set period of time, accruing interest, with longer loan periods yielding higher interest rates. This works just like if the bank loans money to you, with longer repayment terms carrying higher interest rates that you must pay.

These rates depend, to a degree, on the national average interest rate, as well as factors like your credit score. While in this sort of loan you repay the bank in installments over time, with a CD you promise the bank that they will have all of your money for the set number of years, and then you'll get it all back at once, with interest.

In Canada, the analogous products to American CDs are called guaranteed investment certificates, or GICs. Like with CDs, the interest rate depends on the national average at the time of investment. Whatever the interest rate is when you open a CD or GIC, that is the fixed rate for the duration of the loan, regardless of rising or falling rates over the period of investment. Again, this is similar to fixed-rate loans a bank would give you, as opposed to variable-rate loans or credit cards.

While CDs or GICs are a safe investment in that they are guaranteed to give you the stated interest, the downside is that you can't access that money at all for the duration and are locked into whatever the rate was at the time you initiated the investment. Both of these risk factors increase if you make a large deposit.

One approach to mitigating these risks is to make a CD or GIC "ladder," where you make a sequence of smaller investments over time, such that you lock in an average of the interest rates over that time period and regain access to your money in increments sooner. For example, instead of investing $10,000 in a single CD at the rate in a given year, you could invest in five $2,000 "rungs" in five consecutive years at the current interest rates. In addition to the average rate changing from year to year, different institutions offer higher or lower interest rates, and making a CD or GIC ladder lets you shop for the best rates across institutions at any given time.

While Forbes lists the average CD rate as between 0.65 percent and 1.06 percent in 2021, depending on the length of the CD term, GIC rates hover between 1.30 percent and 2.20 percent, on average and depending on the length of the GIC term.

Most estimates and calculators, like this one from the Mayo Employees Federal Credit Union, will assume rates for CDs and GICs up to five years, as that is the most insurance companies such as CDIC will cover for such investments. Although you can take out CDs and GICs for longer terms than that, they become riskier due to the lack of insurability.

Rates have fluctuated over time, and it's important to consider that while this money is tied up in a fixed interest rate account for an estimated five years, or 10 years if you create a five-rung ladder of five-year GICs, the rate of inflation can increase beyond the rate of return. For instance, over the 10 years between 2005 and 2015, investors who took out GICs saw a return between 0.47 percent and -0.41 percent in terms of "real" dollars. "Real" dollar amounts take into consideration the buying power of the same amount of money across different periods of time.

The purchasing power of a given amount of money changes over time with the average cost of goods and the inflation rate. Over the course of recent history, purchasing power has trended downwards. In this way, $20 in 2010 would have the power to buy more than $20 would in 2020 as inflation rates change and the average price of goods rises. So, if you invested $20 in 2000, the reasonable interest rate you locked in at that time may not have ended up keeping up with inflation and changes in purchasing power.

The US Inflation Calculator gives you one way to understand the changes in purchasing power due to inflation. If you had two $20 bills in 2000, used one to buy a stable food item and kept the other in your glove compartment, that same food item would cost roughly $32 today and that $20 would not be able to cover it. The purchasing power of that $20 has decreased. In this way, longer-term investments like CDs can still carry some risk.

​Consider also:​ How to Buy a Canadian Certificate of Deposit