High Interest Savings Accounts

In today’s economic environment, a regular savings account offers very little interest – often at around 0.30%. However, banks and credit unions still need to attract deposits in order to make new loans, which is why you’ll see them offer higher rates for large deposits of typically $5,000 or more. High interest savings accounts in Canada, however, typically have no minimum deposit requirement, and pay anywhere from 1.05% at the major banks to close to 2.00% at online banks and some credit unions. Here, we’ll explain how else high interest savings accounts differ from regular savings accounts, as well as how to use them to your advantage.

What are high interest savings accounts?

High interest savings accounts, as their name suggests, offer a much higher interest rate than what’s available with a regular savings account. Financial institutions are able to offer these rates for a few different reasons:

  • Some of the banks are branchless, which cuts down on costs.
  • Because transactions can be costly, most customers don’t use the accounts for daily activity, so from the bank’s end there aren’t many transactions to process (which also keeps costs low), and
  • Banks offer high interest rates, in order to acquire new customers.

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What types of transactions can you perform with high interest savings accounts?

With a high interest savings account, you can make:

  • Deposits (cash and cheques)
  • Withdrawals (at ATMs, bank tellers, in stores, etc.)
  • One-time payments for goods and services
  • One-time bill payments
  • Pre-authorized payments (insurance, mortgage, rent, utilities, etc.)
  • Transfers (between two users of same lending institution)
  • E-mail money transfers (both send and receive)

Summary of high interest savings account fees

As with a regular savings account, there is usually no monthly fee associated with maintaining a high interest savings account. However, there are often fees associated with some of the transactions you perform:

Fee What is it? How much?
Monthly Fee If you have a limited number of transactions included in your savings account plan, you may be charged a small fee per each additional transaction you go over Typically $5 per additional transaction
Email Money Transfer Fee To send an email money transfer to someone, you will be charged a small fee; it’s free to receive email money transfers sent by someone else Typically $1-2 per transaction
Non-Bank ATM Withdrawal When you withdraw money from an ATM attached to another lender (not your own), you are usually “dinged” with a fee Typically $1.50-2.50 per transaction, $3-$5 at foreign ATMs
Monthly Statement Fee To encourage more clients to go paperless, many lending institutions charge a small fee to print/send a copy of your monthly statement in the mail Typically $2-5 per month
Interim Statement Fee If you want to get a statement at any time throughout the month, you’ll have to see a bank teller and pay a fee to have it printed Typically $2-5, sometimes free

As you can imagine, high interest savings accounts can become very expensive, if you are completing a large number of transactions from your account each month. For many of these accounts in Canada, you will be charged $5 every time you make such a transaction, and there may be no debit transactions included each month. If you need an account for transactional purposes, you may want to consider a chequing account instead.

Case Study: Regular savings account vs. high interest savings account

Margaret has $10,000 in a regular savings account that is currently earning 0.35% interest. She hears about a high interest savings account that pays 1.50% annually. Assuming she moves her money into the high interest account and pays no fees, how much more interest will Margaret earn compared to her current account, over 5 years? (In both cases, her money will compound on a monthly basis.)

End of Year Balance at Regular Savings Account Balance at High interest Savings Account Difference
1 $10,035.00 $10,150.00 $115.00
2 $10,070.12 $10,302.25 $232.13
3 $10,105.36 $10,456.78 $351.42
4 $10,140.73 $10,613.63 $472.90
5 $10,176.22 $10,772.84 $596.62
Totals $10,176.22 $10,772.84 $596.62

Over 5 years, the high interest savings account would provide a return of $772.84 or 7.73%. By comparison, the regular savings account would accumulate just $176.22 of interest or 1.76%. Margaret earns $596.62 more by moving her money into the high interest savings account.

Watch out for short-term promotions: They’re good (but not as good as they seem)

Some financial institutions have begun advertising reasonably higher interest rates (over 2.00%) in order to convince savers to switch over from their current bank. The advantage of these offers is obvious: you’ll receive more interest on your savings. Who wouldn’t want to make more money? There is a downside, though.

Enticing as these higher rates are, these promotions generally only last for an introductory period (usually 3-6 months), after which the interest rate generally reverts to a more standard rate. When evaluating these opportunities it’s important to find out what interest rate you’ll receive after the introductory period. Once you know that, run your numbers to see if you’ll actually make more money in the new account versus the old one.

Tax implications

You aren’t likely to make significant amounts of interest in a high interest savings account but, even so, you must know that the interest you do make will be fully taxed by the Canada Revenue Agency. In other words, you will be taxed at whatever your marginal tax rate is (as opposed to say, eligible dividends or capital gains, which are more tax-friendly). The one exception to this are savings held in a tax-free savings account.

If you don’t need the money, open a high interest savings account

For day-to-day transactions, a chequing account is your best option. And for small amounts over and above what you need for daily use, a regular savings account is a good choice. But if you have money that you just want to park in a bank account and earn a higher rate of interest on for a period of time, a high interest savings account is the better bet. You won’t pay fees if you don’t use it for debit transactions, and the interest is significantly higher than what you could get with any regular savings account.

If you can find a rate close to 2.00%, the annual return on a high interest savings account does something very important for your financial future: it can maintain your purchasing power. If consumer prices are rising by 2.00% a year (also known as inflation), you at least need to obtain that return on your savings just to keep pace with inflation. Depending on the rate of return you’re being offered and the rate of inflation, a good high interest savings account can achieve this.