Modify compounding instructions in higher rate environments | GIC discussions | Discussion forum

You seem to be suggesting that you can change instructions part way through a GIC term. Is that correct? Or are you talking about changing instructions on a renewal?

ca-tech-fire said
.... I do have some GICs maturing next November at rates around 3%. I've modified the interest payout instructions to deposit to my account instead of compounding. Then I will take that money and put it in a 5% gic instead. I think this should be discussed as a valuable option for GIC ladders in this higher interest rate environment.  

Do you mean, as an example, that if I bought a non-cashable GIC for a term of multiple years last spring, and compound annually, at a rate that kinda sucks currently, that if I could get the interest $s out by this method to get a significantly higher rate today with a new GIC instead of compounding at the lower rate.
I guess if the time, interest rate differential and total dollars make it worth the effort....I've never looked at this, I wonder if instructions can be changed at my FIs...

ca-tech-fire said Yes, I have a 5 year non-cashable GIC that I can get the interest out instead of compounding it back to the crappy rate.  

Be careful about the interest rate. Many institutions that allow annual interest payments in lieu of compounding will give a lower interest rate on those payments.

I haven't seen any reduction in GIC rate for annual payout of interest compared to annual compounding of interest to maturity. There should not be as the internal rate of return is identical between annual payout and annual compounding.

Where I have seen a reduction is for monthly payout of interest. That is effectively asking for monthly compounding instead of annual compounding.

4% per annum with monthly payment of interest has a slightly higher internal rate of return than 4% per annum paid out at maturity in one year:

Loonie said
There is an advantage to the FI if you leave your money there because they simply have more of it to play with, they don't have to get it from a new customer, and it gives them more time to come up with the money to pay you.
That's why the default mode is always for compounding. You often have to ask specifically to get it changed to annual pay.

At Wealth One, the GICs used to say (and maybe still do) that the interest would be compounded, period. No other option was even mentioned, but you could get it if you knew enough to ask. (I asked, and I received.) Clearly they preferred that you didn't ask.
Same goes for auto-renewals.  

It’s less admin esp for GIC brokers since they don’t have to do the paper work, even saves a few $ on stamps.
Big banks are fully automated so technically should make minimum diff to them. But yes cleaner for them if just paid at end.

Tangerine asks you how u like it when u set up a new GIC, and looks like one can even change it midship ? Haven’t tried it myself.

Investor edge wil show diff rate if payable semi annually vs annual vs at maturity.