Our guide to high-interest savings accounts

 

What is a high-interest savings account?

A high-interest savings account (or HISA, for short) is a savings account that features a higher-than-average interest rate (usually around 1-1.7% range, but certain banks may offer limited-time rates above 2% as part of a promotion).

 

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 if your goals are long-term (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 you make with HISAs 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.

 

Choosing the right high-interest savings account

Wondering how to pick the best HISA 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.

 

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.

 

Interest

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.

 

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.

 

How to open a high-interest savings account

To open a HISA, first make sure you are:

• 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’ll need is:

• Personal information such as your full name, mailing address, and date of birth
• Your social insurance number 
• A 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.