I recently saw an ad for TD Bank’s 5-year “Stepper” Guaranteed Investment Certificate (GIC). The ad made the product seem quite attractive. A sign of great marketing is turning a negative into a positive.
A Stepper GIC offers a low interest rate in the first year with an increase in the interest rate paid each year. It’s like getting a raise each year. Who wouldn’t want a raise? All the major Canadian banks have GICs like this with different names:
Royal Bank - RateAdvantage GIC
Scotiabank - Accelerated Rate GIC
BMO - RateRiser GIC
CIBC - Escalating Rate GIC
TD Canada Trust - Stepper GIC
In TD’s ad, the most prominent part of the picture showing the interest rates is “8.0% In the 5th Year.” Where else can you get 8% on your savings? Here are the advertised interest rates for each year of this Stepper GIC:
Year 1: 1.5%
Year 2: 3.0%
Year 3: 3.5%
Year 4: 4.0%
Year 5: 8.0%
The average compound interest rate works out to 3.98%. Suppose that this GIC were marketed differently. Imagine that TD offered a 5-year GIC at 3.98% interest with the following penalties for early redemption:
After year 1: 2.38%
After year 2: 3.30%
After year 3: 3.75%
After year 4: 3.72%
This is exactly the same GIC as the Stepper. Through the magic of marketing, the disadvantage of scary-looking early redemption penalties has been turned into a rising interest rate with no mention of penalties. In my description, the highest interest rate you hear about is 3.98%, but TD’s version gets to trumpet 8% in the final year.
I’m not saying one way or the other whether this GIC is a good deal for you. But we should all see it for what it is: a fixed-rate GIC with early redemption penalties.