How does a high-interest savings account work?

Similar to a normal savings account, a HISA serves as a place to deposit money you don’t need access to all the time. While there, it accrues a high rate of interest over time, increasing your balance organically the longer you maintain the account. In short, it’s a great way to let your money grow while you sleep.

That being said, while you’re free to withdraw your money from a HISA at any time, they do come with a fair amount of regulations. Most notably, transfers from your HISA account could take one or two days to complete, and you may also have to pay a fee. Each institution is different, however, so make sure you’re aware of their specific rules before deciding to open a HISA.

How do HISAs earn interest?

While the interest on a HISA is typically shown as a yearly percentage, it is calculated daily and paid back into your account on a monthly basis, creating what’s known as compound interest (or interest on top of interest). If we were discussing compound interest in the context of credit cards, that would spell bad news, but those maintaining HISAs benefit greatly from it.

As an example, if you deposited $15,000 into your HISA with an interest rate of 1%, you would receive $150 in interest if you leave your account untouched for a whole year. That would bring your total balance to $15,150 without lifting a finger. 

An important thing to note, however, is that interest on a HISA can change without warning, so always make sure to keep an eye on your current interest rate and monitor any fluctuations.

Are HISAs good for long-term investment?

HISAs are an excellent way to dip your toes into the investment world with very little risk, but also mean your rate of return is lower than what you can earn with other investment vehicles. For longer-term saving goals (such as retirement), you’ll most likely need to move your money into higher-yielding investment options to accomplish them.

 

Do you pay taxes on HISAs?

Similarly to regular earnings, the interest generated through your HISA savings is taxable by the federal government and is subject to the same rate. To find out how much you need to disclose at tax time, find the figure as part of the T5 tax form supplied by your financial institution.

 

How to choose the best high-interest savings account

Wondering how to pick the best high-interest savings account for you? Here are a few common things to consider when shopping around:

 

What are you saving up for?

One of the first things to ask yourself before opening a HISA is “what are my financial goals?” Are they short-term, such as saving up for an exotic vacation or a car? Perhaps they’re longer in scope, like putting money away for a down payment on a home? Whatever the reason, choose a HISA that will provide the flexibility you need while helping you meet your saving needs and goals. 

 

Minimum deposit

It’s common for some banks or credit unions to require a minimum deposit when opening your account, but the specific amount can vary wildly, so make sure you know the specific figure (or ask a customer service representative for that information) before opening your HISA.

 

Interest rate

You wouldn’t be considering a high-interest savings account if you didn’t want a great interest rate, so make sure this is one of the first things you look at when comparing HISAs. Many financial institutions will feature ultra-high promotional interest rates, and while these can be attractive, it’s important to remember that they’re only temporary. Once the promotional period ends, they’ll quite often drop, so you’d do better to compare standard interest rates rather than promotional ones. That being said, if you think you can hit your savings goal within that promotional time frame, a temporarily high interest rate could be your best friend.

 

Fees and charges

While most HISAs don’t charge a monthly fee, some may still charge you for withdrawals or transfers in certain circumstances. Make sure you’re aware of your financial institution’s fees and policies before signing up.

 

How to open a high-interest savings account

To open a HISA, first make sure you meet the following criteria:

• The age of majority in your home province or territory
• A Canadian resident with a permanent address
• In possession of a social insurance number (SIN)

If you meet these requirements, simply visit your financial institution online and follow their navigation instructions to open a HISA. In most cases, what you will need to provide is:

• Personal information such as your full name, mailing address, and date of birth
• Social insurance number 
• Valid email address

If you would rather open a HISA in a brick-and-mortar bank branch, just make sure your chosen bank or credit union operates physical locations and is not online-only.

One important note: not every financial institution offers HISAs to residents of every province (this is particularly true for credit unions). Always make sure you’re eligible for a HISA before applying.

 

HISAs vs. Chequing accounts

Unlike a chequing account, which is typically used for day-to-day transactions like paying bills, savings accounts are meant as a short-term investment vehicle to help grow your savings conservatively with absolutely no risk. The cash you deposit in a savings account is “liquid”, which means your money is always accessible and can be withdrawn at any time. It’s why a savings account is an ideal place to set aside extra money for large but predictable expenses (like a vacation or upcoming big-ticket purchase), or an emergency fund.

 

HISAs vs. Regular savings accounts

The decision on whether to keep your money in a HISA or a regular savings account largely depends on your particular savings goals. Because HISAs have a much higher interest rate than run-of-the-mill savings accounts, they tend to be a better bet if you're saving for something significant (i.e. a car or wedding). Plus, while HISAs are fairly liquid, they're primarily designed for longer-term savings. This means you could encounter withdrawal limits, minimum balance requirements, or transaction fees if you want to habitually take funds out of the account.

Regular savings accounts, on the other hand, are perfect for keeping money that you may not have any specific plan for but don't need in your chequing account.

 

HISAs vs. GICs

While both HISAs and GICs are safe, protected places to store your money, the most important differences between the two are liquidity and interest.

GICs are "locked-in" investments, meaning that when you open one, you agree to keep your money there, untouched, for a specific period of time (this can be anywhere from a matter of months up to ten years). If you decide you want to access your funds before that, you'll be subject to a penalty for withdrawal. Because you've guaranteed the bank that your money will remain in the GIC for the agreed-upon period, however, you'll likely earn higher interest. Plus, the longer you agree to lock your money away, the higher your interest rate will be.

HISAs, on the other hand, are far more flexible, allowing you to access your money at any time, but tend to offer lower interest than that of GICs.

 

How does the Bank of Canada's overnight rate affect interest rates on HISAs?

The Bank of Canada's overnight rate dictates changes in the prime rate, which then influences the amount of interest earned on HISAs and investments such as GICs. Because banks and other institutions who offer these accounts can afford to be competitive with their interest rates, those who keep money in HISAs can take advantage of higher interest when the BoC's overnight rate rises.