May 9, 2017
Pattie Lovett-Reid: Risks and guarantees for Home Capital clients
Chief Financial Commentator, CTV
In today's low interest rate environment, who isn't looking to pick up a little higher yield?
With next to nothing being paid in your savings account, typically one notch up the risk curve is a Guaranteed Investment Certificate, often referred to as a GIC. This is simply a Canadian investment that offers a guaranteed rate of return over a fixed period of time, most commonly issued by trust companies or banks.
Due to its low risk profile, the return is generally less than other investments such as stocks, bonds or mutual funds. The ideal candidate for a GIC is someone who is extremely risk-averse, looking to preserve wealth or simply wanting to balance out their portfolio.
A key element here is institutional risk. In other words, will the financial institution be solvent and have the money to pay you back at maturity?
In light of the run on the high interest savings accounts from Home Capital Group, the alternative mortgage lender currently under investigation by the Ontario Securities Commission, I reached out to CDIC to confirm that savings and investments by Home Capital subsidiaries Home Trust and Home Bank are in fact covered by depositors insurance. Eligible deposits – such as savings accounts or GICs with original terms to maturity of five years or less – are protected up to $100,000 in seven separately protected categories. Depositors can find helpful information about their personal CDIC coverage on their website, cdic.ca.
Home Capital has seen outflows from its GIC balance standing at $12.64 billion on May 5, down from $12.86 billion at the end of April. Given all the volatility and uncertainty around investments in the lender, coupled with your own personal tolerance for risk, now might be the time to review the value and registration of your holdings and your contract.
“People are taking risks with their cash. This is what this whole event has caused people to remember: Take security,” Som Seif, founder and CEO of Purpose Investments, told BNN in an interview Tuesday. “The increased value that you have is not meaningful relative to the amount of risk that you are taking.”
Seif added that most people who have investments with Home Capital should be okay, noting the lender's assets are in good shape.
If you have agreed to a non-cashable/non-redeemable GIC, you are usually bound to hold the investment until the maturity date. In order to break the contract, you would have to demonstrate financial hardship and even then, it is at the discretion of the issuing financial institution, as they are under no obligation to let you redeem. The rational is you accepted a higher rate of return for less flexibility.
When you buy a regular GIC, typically you let your money mature and when the term comes to an end you basically have three options:
1. Roll it over. Invest all or part of it in another GIC.
2. Buy another type of investment, or;
3. Cash it in and tell your financial institution whether you want the money deposited into your bank account or ask for a cheque.
There are, however, times when an investor may want to cash it in early – and depending on the type of GIC you have, you may be able to do that. Before buying, you should always find out if there is a penalty if you have to cash it in early.
Cashable or redeemable GICs allow you to cash them in early, before maturity, without a penalty. With regular GICs, you will likely have to pay a charge or penalty for taking your money out early. Even if you only need some of your money, you might have to take it all out. Also, you may not earn any interest.
Rule number one when investing: Even if it is in cash or near cash equivalents, always be clear on the details before you buy.