What Is a High-Interest Savings Account in Canada?

There are plenty of savings tools available in Canada. You have probably heard of a regular savings account, but what about a high-interest savings account? It might sound complicated, but, truthfully, it has potential benefits that can make quite a difference when used under the right circumstances.

Recently, more Canadians are looking for a way to earn better returns on their cash without locking it away in a long-term investment. This, combined with rising interest rates and a higher cost of living, has made high-interest savings products much more common. Many people now use them for emergency funds or short-term savings goals.

Before you can decide if a high-interest savings account is right for you, it’s helpful to understand how these accounts work, what sets them apart from traditional savings accounts, and the key features you should look for.

High-Interest Savings Account Defined

A high-interest savings account (HISA) is exactly what it sounds like, a type of savings account that pays a higher rate of interest than a standard savings account. Its purpose is to help your money increase quickly while still keeping it accessible.

How High-Interest Savings Accounts Work

There are a few key features of high-interest savings accounts that set them apart from traditional savings accounts.

HISAs often provide competitive interest rates with limited fees. Occasionally, they even offer promotional rates that boost your earnings for a short period. For example, the rate you will earn on the account falls into one of two categories:

• Promotional rate. This will boost your earnings for a set period, typically three to five months, before the promotion expires.
• Regular (non-promotional) interest rate. This will apply on an ongoing basis until you close the account. Often, it is a variable rate that is subject to change by the bank.

The catch is: the interest rate you earn on a regular basis isn’t fixed. This means it can rise or fall based on changes to the bank’s pricing strategy and the country’s prime lending rate. That also means that it has a knock-on effect from the Bank of Canada’s interest rate changes.

Tip: Consider monitoring your account’s interest earnings and compare your options periodically. If your promotional rate is no longer applicable, then you might benefit from switching to a new provider to take advantage of a new account incentive.

Pros and Cons of High-Interest Savings Accounts

Pros of High-Interest Savings Accounts:

• Boosts your interest earnings compared to traditional savings accounts
• Allows easy access to cash for emergencies and short-term savings goals (no lock-in period)
• Most institutions do not require a minimum balance in the account
• Many accounts are eligible for CDIC or provincial credit union deposit protection

Cons of High-Interest Savings Accounts:

• Interest rates are variable meaning they can change at any time
• Promotional rates are available for a short timeframe only
• Transfers into and out of the account can take up to one or two business days

Example Uses for a High-Interest Savings Account

• Emergency funds
• Short-term savings for school tuition, home renovations, or travel plans
• Storing tax money for self-employed individuals
• Saving for a down payment on an upcoming house purchase

High-Interest Savings Accounts vs Regular Savings Accounts

Before you can decide if a HISA is right for you, it’s important to understand how it compares to a standard savings account. The two have very different advantages and purposes. Here’s how they compare:

High-interest savings account:

• Higher relative interest rates
• Often no monthly account fees
• Promotional rates available for new customers

Regular savings account:

• In-branch support when you need assistance
• Connection to your everyday banking accounts
• Lower withdrawal limits, which can help you stay disciplined

While both types of savings accounts can be helpful, there are clear benefits to each depending on your situation. For example, a high-interest savings account makes sense when you want your money to grow fast but still need your funds accessible. Think emergency funds, travel savings, or other short-term goals. A regular savings account, on the other hand, may be better for those who value in-person banking or have a small amount of savings.

The bottom line? There is no right answer. Only what is best for your personal situation. In fact, you may not even need to make a distinct choice between the two. You can also opt for a setup that includes both account types.

How to Choose the Right High-Interest Savings Account

Once you decide that a HISA is ideal for you, the next step is to choose the right financial institution to open the account with. As you weigh your options, consider the following:

• Compare everyday, non-promotional yields as this is the rate that you will earn for the majority of the time you have the account. The promotional rate is often available for the initial few months only.
• Read the fine print on any promotions. The listed rate may only be available on a specific portion of your balance. Or you might need to maintain a certain account balance to qualify.
• Note account fees. Over time, these costs can take away from the yield you earn and eat into your deposit.
• Confirm that your deposit will have coverage from either the CDIC or from a provincial insurer.
• Evaluate customer service options and whether you will have access to telephone, chat or in-person assistance.
• Check digital tool quality. If you prefer to do all your banking online, the institution’s mobile application and web-based platform can have a big impact on your ability to manage your finances.
• Look into the ability to set up automatic savings contributions. Some banks even have a round-up feature, helping you save money by rounding your purchases up to the nearest dollar and putting the difference directly into your savings. Consider if this option makes sense for you.

Takeaway

A high-interest savings account is a powerful tool for Canadians seeking higher returns without giving up access to their cash. While the interest rate can fluctuate and promotional offers don’t last forever, their overall value makes them an appealing option.