Long Term Impact of Low vs High Interest Savings in Canada

When it comes to earning interest on your savings, there are various accounts with different interest rates that get stacked onto your deposits over time. These interest rates can be high or low. 

While low-interest savings accounts can be convenient and adequate for the short-term, they also provide a slower growth-rate overall. High-interest savings accounts, on the other hand, can give your balance a better (and faster) boost over time, plus they're suitable for short-term or longer-term investments. 

To learn more about the long-term impact of low vs high-interest savings, keep scrolling. 

What is a Low-Interest Savings Account

Starting from the bottom, let’s break down low-interest savings accounts.

Low-interest savings accounts typically offer rates ranging from near 0% up to around 1%, depending on the institution. Compounded interest means that you’ll earn interest on top of pre-collected interest, optimizing your savings in the best way possible.

Most of the time, traditional bank savings accounts come with low-interest savings. For example, you can expect lower overall interest rates from the big five banks (BMO, CIBC, RBC, Scotiabank, and TD). To remedy these low regular interest rates, most of these banks offer welcome bonus interest rates. These temporary rates disguise big bank savings accounts as high-interest instead of low-interest, at least for a few months. After their promotional periods come to a close, however, earners are subject to the bank’s everyday low interest rates.

Typically, traditional banks get away with offering lower interest rates than their alternative digital platform counterparts because they already have an extensive clientele that tends to stick with them oftentimes out of pure convenience. 

What is a High-Interest Savings Account

High-interest savings accounts typically offer rates meaningfully higher than traditional bank savings, often above 2%.

When we say “regular rates” note that we mean everyday rates beyond any promotional periods – since we’re talking long term after all. 

While we previously applauded low-interest savings accounts for having no-fee options, there are also some high-interest savings accounts with better rates and no fees, consider accounts from digital platforms like PC or EQ Bank for example.

Like low-interest savings accounts, high-interest savings accounts also use a compounding system, heaping new interest over previously earned interest. This system is far more superior through a high-interest savings account though, because the higher interest rate amplifies the effect of compounding over time.

To find the best high-interest savings account for you, check out our Best Savings Accounts blog post.

What Impacts Your Savings in the Long Term?

Below, we’ve included some key factors that can impact your savings. Some of these factors pertain solely to low-interest savings, others pertain to both low-interest savings and high-interest savings.

Added Fees

Of course, if your savings account happens to come with any added fees this will impact your overall savings in the long run.

Some accounts, frequently big bank low-interest savings accounts, have withdrawal or transfer fees. This means that if you ever want to transfer or withdraw a portion of your savings, you’ll need to pay for the transaction. This is true for accounts like the BMO Savings Amplifier Account or the CIBC eAdvantage Savings Account.

Other accounts will enforce minimum balance requirements, meaning you’ll need to keep a certain amount of money inside your account at all times. You can expect to see these requirements on account tiers within the Scotiabank MomentumPlus Savings Account (an overall low-interest savings account), the TD ePremium Savings Account (a low-interest savings account).

Certain accounts also come with monthly fees to keep your account active. You’ll see this on certain tiers within a KOHO Savings Account (a high-interest savings account) for example.

Ultimately, all of these added account fees affect your savings by unfortunately dipping into them.

Taxes

As much as we wish it wasn't true, the interest you earn on your high-interest or low-interest savings account is taxable income. Essentially, any interest you earn on your savings must be declared when you file your tax return. The rate at which you’ll be taxed of course depends on your tax bracket, which is based on your annual income.

Inflation

Inflation embodies the economic growth of the cost of goods and services over time. 

Unsurprisingly, inflation is also a big factor that can affect your interest rates on savings, particularly if you store your savings with traditional banks. The Bank of Canada is constantly increasing and decreasing interest rates to temper inflation.

Savings rates are influenced by, but not directly tied to, the Bank of Canada’s policy rate, which is the target interest rate from which major Canadian financial institutions can borrow and lend money between each other overnight. When the Bank of Canada’s overnight rate fluctuates, it impacts the interest earned on traditional bank savings accounts, which can be good or bad. If the overnight rate increases, you can earn higher interest on your savings, but when the overnight rate decreases, so can the interest rates on your balance.

Typically, you’ll want your savings account interest rates to be higher than the inflation rate for your savings to have better growth potential and spending power.

Contributions

In most cases, you can simply allow your initial deposit to sit inside of your savings account to incrementally collect interest. Alternatively though, you can also contribute to your savings account through regular deposits – whether they be monthly or biweekly – and build onto your balance from both sides.

By making your own contributions to your account, whether big or small, you can boost your savings even further and even faster – especially if you have a high-interest savings account.

So, Which Type of Savings Account is Better in the Long Term?

In the long term, a high-interest savings account is superior to a low-interest savings account. Why? Simply put, you’ll gain more money overall by comparison.

To be clear, the best high-interest savings account in this case is one that has a high regular interest rate – not just a high promotional interest rate. High promotional interest rates typically only last a few months to about half a year. So, if you plan on saving money for longer than those time frames, you’re better off with a more consistent, high regular interest rate option, especially since there are some Canadian contenders with no added fees.

To help you gather all of the information we’ve packed into this text, here’s a table that clearly points out the differences between low interest savings and high interest savings, including how beneficial they are in the long term.

To make this conclusion even more clear for you, we’ll even provide a real life example:

Let’s say that you have $10,000 that you’d like to put inside of a savings account and you plan on keeping it there for 10 years.

If a low-interest savings account will offer you, say, 0.5% interest on that deposit, in 10 years you’ll only have $10,511 in that account. Note that this is assuming the account has no promotional period and you haven’t added any additional deposits. With a promotional period, this rate would climb only slightly higher. For example, even if the promotional rate was 5% for 3 months (which is a possibility when you meet certain conditions currently with the Scotiabank MomentumPlus Savings Account), then you’d still only collect approximately $10,636 in 10 years.

However, if you put that $10,000 inside of a high-interest savings account that earns 3.5% interest consistently, you could have $14,105 in 10 years and your money would be nearly doubled in 20 years if you chose to stick around.

Alternative Long-Term Savings Accounts

Maybe you’d like to optimize your money even further for longer, or reap certain tax advantages along the way. In either of these cases, consider one of the following long-term savings account alternatives instead (depending on your financial goals or situation):

• Tax-Free Savings Accounts (TFSAs): allows savers to earn tax-free interest on their deposits.
• Registered Retirement Savings Plans (RRSPs): where savings are contributed to an earner’s taxable income, reducing the amount they’ll owe when it’s time to file. That said, withdrawals are still taxable. 
• Guaranteed Investment Certificates (GICs): when you put money into a savings account for a specific period of time (anywhere from several months to 10 years) to earn higher interest rates overall (higher than a high-interest savings account). Penalties apply when funds are withdrawn before the set term is up.
• Registered Education Savings Plans (RESPs): a tax-free account designed to help parents save for their children's post-secondary education.
• First Home Savings Account (FHSA): a savings account created for first-time homebuyers, enabling them to save up for a down payment on a home. These accounts allow for tax-deductible contributions, tax-free interest earnings, and tax-free withdrawals for an eligible home.

Exact interest rates tied to each type of long-term savings account will depend on the issuer.

Conclusion

In summary, the long-term impact of high-interest savings is much more positive and lucrative than the long-term impact of low-interest savings.

Overall, long-term high-interest savings will yield much more money compared to long-term low-interest savings, plus there are even some high-interest savings account options with no added fees.

Both types of savings accounts, however, have taxable interest which is where alternative long-term savings accounts like a TFSA or an RRSP would be more beneficial. 

There are also other long-term avenues like GICs, which have the potential to earn you higher interest rates if you can commit to keeping your savings stored away for a fixed period of time.