All About High-Interest Savings Accounts

If you want to save money faster, you should look into some of the best high-interest savings accounts in Canada. Regular savings accounts are good for having cash ready, but high-interest savings accounts help your money grow faster. They’re an easy way to earn interest on all your money.

But what is a high-interest savings account, you ask? A high-interest or high-yield savings account is a type of savings account that offers a higher interest rate compared to a regular savings account. In Canada, you can often find HISAs with interest rates of at least 2.0% or higher. In contrast, regular savings accounts, like the ones that come with your everyday chequing account, usually offer a low interest rate of less than 1.0%.

How does a high-interest savings account work?

Canadian high-interest savings accounts are just like regular savings accounts but with better interest rates. HISAs can offer some of the best interest rates that are ten times higher than those of traditional savings accounts, sometimes even more. For example, instead of earning 0.3% interest on a traditional savings account, a HISA might give you up to 5.0%. So, with $10,000 in savings, you could earn $500 in interest in your first year.

High-interest savings accounts typically come with Canada Deposit Insurance Corporation (CDIC) protection of up to $100,000. Also, be aware that, just like with a traditional savings account, any interest you earn will be taxed by the Canada Revenue Agency (CRA) come tax season.

HISAs are ideal for short and mid-term goals, like planning a dream wedding, building an emergency fund, or saving for a downpayment on a home. They keep your money safe from market changes and earn more interest than chequing or regular savings accounts. Plus, you can open as many HISAs as you want, meaning you can easily see how much money you have saved for each goal.

Rules and fees of a high-interest savings account

Are there any rules? It really depends on the bank or financial institution. When you put money in, the bank pays you interest on your balance. But while you can access your money anytime, many high-interest accounts limit how many withdrawals and transfers you can make each month.

This means when you’re comparing different HISAs, you’ll want to check for maximum withdrawal limits, as well as if they have any fees, such as:

• Transaction fees

• Monthly fees

• ATM fees

• NSF fees

• E-transfer fees

• Withdrawal fees

While some high-interest savings accounts are fee-free, others may charge monthly fees or other costs depending on the account’s minimum balance and terms. Some institutions impose monthly account fees, while others charge transaction fees, which can be as high as $5 per e-transfer or withdrawal. If you don’t make many transactions and the account offers a good interest rate, these fees might not be a problem. However, it’s important to check the details so you know what to expect and avoid any surprises.

Some HISAs also require a minimum deposit to open an account. Also, some may require you to maintain a minimum balance, while others might offer you a higher interest rate to entice you to keep a minimum balance in your account.

Interest rates on high-interest savings accounts

When choosing the right high-interest savings account, you need to be mindful of the interest rate. While the interest rate is crucial and often what attracts you initially, you must make sure to look beyond the surface. Many Canadian banks and financial institutions advertise high-interest savings accounts with a competitive interest rate of 6.0% or more, but you must always check the fine print.

While these high rates seem very enticing, they are often only introductory or promotional (also called a welcome bonus interest rate) and may drop significantly after a few months, back down to the bank’s regular savings rate. That’s why, when comparing HISAs, it’s often better to find an account with a slightly lower but stable, long-term rate.

However, not all banks follow this approach. For example, KOHO doesn’t offer a promotional rate but instead provides a consistent 5.0% APY on your savings with daily compounding that’s paid monthly.

How is interest calculated on a high-interest savings account?

Interest on a Canada high-interest savings account is often displayed as an annual percentage yield (APY). APY represents the amount of interest you earn in one year. And here’s one of the best parts about HISAs—APY includes compound interest.

This means you earn interest on both your original money (your principal) and the interest you’ve already earned. How often this interest is calculated (compound frequency) and added can vary—it could be daily, monthly, quarterly, bi-annually, or annually.

HISAs are usually calculated daily and paid monthly. The more often your interest is compounded, the faster your money grows.

Let’s break it down for you.

Imagine you have $10,000, and you earn 5.0% interest annually. With simple interest, you get $500 each year, always based on the initial $10,000.

However, with compound interest, things get more interesting. In the first year, you’ll earn $500, just like with simple interest, making your total $10,500. In the second year, you’ll earn interest on $10,500 (your original $10,000 plus the $500 from the first year), so you’ll earn $525.00, bringing your total to $11,025 for the second year.

Now, let’s switch to monthly compounding, as that’s what’s common with HISAs. In the first year, you’ll earn $511.62. After two years, you’ll have earned $1,049.41.

So not only are you earning more interest, but your interest is growing even faster as it’s compounded monthly. Plus, the longer you leave your money in, the more you’re going to earn. With your initial $10,000 at 5.0% interest and monthly compounding, you will have $16,470.09 after 10 years. After 30 years, your original $10,000 will grow to $44,677.44.

And keep in mind that these numbers assume you’re not adding more savings to your HISA throughout the years, which you (hopefully!) would be.

Benefits of a high-interest savings account

Financial institutions offer high-interest savings accounts as better options than regular savings accounts because they have higher interest rates. These accounts often don’t have monthly fees, making them a smart choice for earning more money compared to a regular savings account.

Because they offer higher interest rates, the more money you have and the more you add, the more you’ll earn. HISAs are easy to manage, and their high interest rates can motivate you to keep adding money and leaving it in the account to grow.

Unlike other types of savings accounts, such as GIC, your money isn’t locked in, which means you can access your funds anytime. Also, HISAs are safe places to keep and grow your money because they are often insured.

The CDIC (Canadian Deposit Insurance Corporation) covers many eligible HISAs for up to $100,000. This makes HISAs a great place to store your money safely and watch it grow.

Plus, opening an HISA is quick and easy. You can do it online or in person. In fact, many online financial institutions offer the highest interest rates for HISAs. Take KOHO, for example; KOHO’s high-interest savings account offers up to 5.0% interest—and no, this is not a promotional rate.

Plus, with KOHO online banking, it’s very easy to manage your funds, make withdrawals, and add more savings whenever you want.

How to find the right high-interest savings account

Good financial planning means finding ways to get the best returns while keeping costs low. It’s important to compare your savings account’s yield to inflation. If the interest you earn doesn’t keep up with inflation, your money’s value decreases over time.

Choose the best rates

Since you’re looking for a high-interest savings account, the interest rate is the most important factor. Compare interest rates, cash back, and other benefits to find the account that offers the best overall value. Just don’t forget to watch out for those promotional interest rates.

Watch out for fees

It’s also important to compare the fees and payment structures of each account. Fees can often surprise new account holders. Some financial institutions charge a monthly fee to maintain your account.

Others may also charge non-sufficient funds fees, overdraft fees, transaction fees, annual fees, and other expenses to maintain your savings account.

Fortunately, not all institutions do. For example, KOHO has no hidden fees, including no NSF fees, e-transfer fees, or interest charges.

Check for minimum balance requirements

Some banks require you to maintain a minimum balance to avoid fees or keep your account active. Sometimes, the interest rate you receive will even depend on your account balance.

Make sure to read the details carefully before opening a new savings account to ensure you can easily meet any minimum balance requirements.

See if it qualifies for CDIC deposit insurance

You want to ensure your money is protected in case the financial institution goes bankrupt. If the bank or credit union is insured by the Canadian Deposit Insurance Corporation (CDIC), your funds are safe up to $100,000 per account type.

Consider the user experience

Now that you understand what a high-interest savings account is, you should think about several factors when comparing accounts. The user experience provided by the financial institution is important, especially for online banks and institutions.

Choose one with an easy-to-use website, a mobile-friendly app, and clear information about their products and accounts.

Compare financial planning features

Building your savings takes time, so many online banks provide tools to help you stay on track with your goals. If this appeals to you, look for an account with helpful financial planning tools.

For example, KOHO’s features include automated savings, real-time spending notifications, access to financial coaching, and more. They also offer a virtual card for easier and more secure online shopping.

How to open a high-interest savings account

The good news is that setting up a HISA is very easy. You can apply online or in person at most financial institutions. To open one, you must:

• Be a Canadian resident

• Have a Social Insurance Number

• Be of legal age in your province or territory

• Provide proof of identity and address

These are the same basic requirements as opening any chequing or savings account. By choosing an HISA with the best interest rate, you can save time and money and gain a financial advantage.

Types of other savings accounts

While HISAs are a popular way to grow your money faster, they aren’t the only type of savings account available. Let’s break down how HISAs compare with other popular saving options.

HISAs vs. Guaranteed Investment Certificates (GICs)

Similar to a High-Interest Savings Account (HISA), you can earn good interest rates with a Guaranteed Investment Certificate (GIC). While both offer higher rates than regular savings accounts, they differ in several ways, including tax-free savings options, monthly fees, daily interest calculation, balance limits, available interest rates, and fund withdrawal methods.

High-interest savings accounts provide more flexibility since you can access your money whenever you want. At most, you might pay a transaction fee for withdrawals, but many accounts don’t charge any fees.

On the other hand, GICs lock in your money for a set term, often offering great interest rates of 5.0% or more, but you typically can’t withdraw funds until the term ends.

GICs usually require a minimum investment of $500 and have terms ranging from 30 days to 10 years. Withdrawing early can result in penalties and loss of interest earnings.

GICs are excellent for ensuring returns over a specific period, but they’re not ideal if you need quick access to your money.

HISAs vs. Tax-Free Savings Accounts (TFSAs)

A TFSA (Tax-Free Savings Account) allows you to hold cash or investments like stocks, bonds, mutual funds, or GICs. The best part is that any money you make in it isn’t taxed.

TFSAs have been available to all Canadians over 18 or 19 (depending on your province) since 2009.

Like HISAs, TFSAs are ideal for short- and medium-term goals, such as saving for a car or a vacation. Plus, depending on your investments, you can usually withdraw the money anytime, tax-free.

However, with a TFSA, you’re unlikely to find higher interest rates like those in HISAs. While financial institutions may offer a high promotional interest rate for a TFSA, they tend to drop back down quite significantly after a few months.

Also, unlike a HISA, there are limits on how much you can contribute to your TFSA each year. However, if you don’t use the full amount, the unused portion will be carried over to the next year.

Also, if you exceed the contribution limit, you may still have to pay tax. And while you can withdraw any amount at any time, the withdrawn amount will be added to your contribution limit for the next year.

So, while TFSAs are great in that you don’t have to pay tax on your savings, you’re not going to earn as much interest as you would with a HISA.

HISAs vs. Registered Retirement Savings Plans (RRSPs)

An RRSP is another type of savings account that allows you to hold cash or investments, but it’s intended specifically for retirement savings.

Unlike with a HISA, the money you contribute to your RRSP can be deducted from your taxable income each year, allowing you to defer taxes until you withdraw the funds.

This account is meant for use after you retire; otherwise, any withdrawals will be added to your employment income at tax time, and you’ll have to pay taxes on the full amount.

Like with a HISA or TFSA, you can have multiple RRSPs at different institutions, but your total contributions cannot exceed your contribution limit, which is typically 18% of your previous year’s reported income. You also have an RRSP contribution deadline to watch for each year.

So, if you’re planning for long-term retirement, an RRSP is definitely the way to go. But if your savings goals are more short-term, you’ll want to put your money in HISA.

Start earning higher interest today with KOHO!

Deposit accounts with low initial deposits are appealing to customers who dislike monthly fees and want flexible withdrawals. These accounts, with monthly interest payments, offer a good balance of accessibility and savings growth, unlike accounts with hidden fees or strict limits. With the right support, your initial deposit can grow, allowing you to benefit from high annual percentage yields.

With a KOHO hybrid chequing-savings account, not only can you earn up to 5.0% interest, but you can also earn up to 5.0% cashback, depending on the subscription plan you select.

Plus, with no hidden withdrawal, e-transfer, or NSF fees and no minimum balance requirement, you can focus on growing your savings faster.

Simply pick a plan, opt-in to earn interest, and start earning straight away with a KOHO account.

In addition to high-interest savings accounts, KOHO offers a variety of financial products, including virtual credit cards, credit building programs, and free credit score checks.