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

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

sp_Feed Topic RSS sp_TopicIcon
Modify compounding instructions in higher rate environments
October 27, 2022
8:52 am
ca-tech-fire
Member
Members
Forum Posts: 17
Member Since:
October 3, 2022
sp_UserOfflineSmall Offline

I have a 5 year GIC ladder that I have been doing for a long time. I didn't dump anything into 5 year GICs at 1% last year, so this year I'm doing some 3, 4 and 5 year GICs to catch up. However, 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.

October 27, 2022
11:01 am
Loonie
Member
Members
Forum Posts: 9398
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

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?

October 27, 2022
11:36 am
ca-tech-fire
Member
Members
Forum Posts: 17
Member Since:
October 3, 2022
sp_UserOfflineSmall Offline

Loonie said
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?  

I'm talking about changing the instructions on whether to compound or not partway through the term. I am able to do this at Achieva and Tangerine but not EQ Bank. Screen-Shot-2022-10-27-at-2.27.56-PM.png
Screen-Shot-2022-10-27-at-11.48.45-AM.png

October 27, 2022
11:59 am
FastJonny
Ontario
Member
Members
Forum Posts: 51
Member Since:
February 20, 2022
sp_UserOfflineSmall Offline

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...

October 27, 2022
12:38 pm
ca-tech-fire
Member
Members
Forum Posts: 17
Member Since:
October 3, 2022
sp_UserOfflineSmall Offline

FastJonny said

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...  

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.

October 27, 2022
1:06 pm
HermanH
Member
Members
Forum Posts: 1242
Member Since:
April 14, 2021
sp_UserOfflineSmall Offline

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.

October 27, 2022
10:07 pm
Loonie
Member
Members
Forum Posts: 9398
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

It may be worth doing if your FI will let you do so without penalty. Herman's warning is well taken.

However, the crappy rates that were previously available mean that you may not have a whole lot of interest to reinvest, so net effect may be minimal. It depends on your situation.

I switched to annual pay last year for all new GICs, of which there were very few. I will do all of them this way in future but won't buy from those FIs that penalize for it. It makes my bookkeeping easier, which I appreciate.

October 27, 2022
10:27 pm
Norman1
Member
Members
Forum Posts: 7204
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

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:

Date Cash Flow
28-Oct-2022 -$10,000.000 -$10,000.000
28-Nov-2022 +$0.000 +$33.973
28-Dec-2022 +$0.000 +$32.877
28-Jan-2023 +$0.000 +$33.973
28-Feb-2023 +$0.000 +$33.973
28-Mar-2023 +$0.000 +$30.685
28-Apr-2023 +$0.000 +$33.973
28-May-2023 +$0.000 +$32.877
28-Jun-2023 +$0.000 +$33.973
28-Jul-2023 +$0.000 +$32.877
28-Aug-2023 +$0.000 +$33.973
28-Sep-2023 +$0.000 +$33.973
28-Oct-2023 +$10,400.000 +$10,032.877
Internal rate
of return
4.00000% 4.07419%
October 28, 2022
12:16 am
Loonie
Member
Members
Forum Posts: 9398
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

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.

October 28, 2022
4:24 am
savemoresaveoften
Member
Members
Forum Posts: 2994
Member Since:
March 30, 2017
sp_UserOfflineSmall Offline

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.

Please write your comments in the forum.