What Is a High-Interest Savings Account?
A high-interest savings account (HISA) is a specialized type of savings account that offers a more attractive interest rate compared to standard savings accounts.
Even though the interest rate is generally variable, meaning it can fluctuate based on market conditions, HISAs still consistently outperform the rates offered by traditional savings accounts.
These accounts are a popular choice among Canadians aiming to maximize their savings for specific goals, such as a home down payment or funding a child's education. High-interest savings accounts are offered by most Canadian banks and credit unions, as well as some online banking platforms like Simplii.
How Do High-Interest Savings Accounts Work?
When it comes to money saving, a HISA often stands out as a superior option compared to traditional savings accounts.
Unlike standard savings accounts, which usually offer meager interest rates, HISAs often provide rates that can even rival those of Guaranteed Investment Certificates (GICs) or term deposits. This higher interest rate level allows your savings to grow more rapidly over time.
Most HISAs in Canada come with no minimum balance requirements and are free of monthly maintenance fees. Still, some institutions might impose a fee for withdrawals made before a certain period, making it essential to compare the features and terms of various HISAs in order to find the one that best suits your needs.
Below are some of the main fees charged by banks for HISAs.
|
Fee Type |
Description |
Average Cost |
|
Monthly Over-limit Fee |
Charged when you exceed the transaction limit set by your savings account plan |
CAD $5 per extra transaction |
|
Email Money Transfer Fee |
Fee for sending Interac e-Transfers; receiving is usually free |
CAD $1-1.50 per transaction |
|
Non-Bank ATM Withdrawal Fee |
Incurred when using an ATM not operated by your own bank |
CAD $1.50-2.50 domestically |
|
Monthly Statement Fee |
Monthly fee for opting to receive a physical copy of your account statement |
CAD $2-3 per month |
|
Interim Statement Fee |
Cost for obtaining an ad-hoc statement from a bank teller |
CAD $2-5, occasionally free |
TFSA vs. High-Interest Savings Account
The majority of Canadians find themselves choosing between tax-free savings accounts (TFSAs) and high-interest savings accounts when planning for their future. Both of these options are popular for a reason, and have their unique merits and drawbacks:
Tax-Free Savings Account
A tax-free savings account (TFSA) is a financial instrument that allows Canadians to earn tax-free income on deposits, interest, dividends, and capital gains. This allows your savings on interest earnings to grow significantly over time.
TFSAs also provide you with the flexibility to withdraw your funds at any time without penalties, making them ideal for short-term financial goals like vacations or car purchases. However, there are annual contribution limits to consider.
High-Interest Savings Account
HISAs, on the other hand, offer higher interest rates than most other savings venues, enabling you to reach your financial milestones more quickly. There are no contribution limits, but the interest you earn is subject to taxation. Additionally, HISAs may come with withdrawal fees, making them less suitable for short-term financial needs and more optimal for those with a long-term savings plan.
Factors To Consider When Selecting a High-Yield Savings Account in Canada
Everyone wants their hard-earned money to work for them as best as it can, which is why choosing the right HISA is crucial for maximizing your savings. Some of the biggest factors to consider when searching for a good HISA offer are:
Interest Rate
The annual interest rate is pivotal in determining how quickly your savings will grow. Some HISAs offer tiered interest rates, which means you'll earn a higher rate only if you maintain a large balance. Additionally, be cautious of temporary promotional interest rates that some banks offer, which often exceed 2% but usually last only for a few months.
We suggest you always use a high-interest savings account calculator to determine how much exactly your money will grow over time.
Minimum Deposit
Some HISAs require a minimum deposit to open an account. If you're a beginner saver, you might prefer an account with no minimum deposit requirement.
Service Fees
While most HISAs don't charge monthly fees, the majority of them do charge service fees, and some much more than others. Always scrutinize the fine print regarding the service fees before committing to opening a HISA.
Deposit Insurance
Most Canadian banks are members of the Canada Deposit Insurance Corporation (CDIC), which provides insurance on deposits up to $100,000 per depositor per account type. If your savings exceed this limit, consider diversifying across multiple CDIC-insured banking institutions.
Bottom Line
In summary, a high-interest savings account serves as an excellent vehicle for accelerating your savings growth. Before committing, compare interest rates, minimum deposits, and any associated fees.
FAQ
What is the difference between a savings account and a high-yield savings account?
The primary distinction is the interest rate. HISAs generally offer better interest rates, allowing for faster capital growth, but they may come with higher minimum balance requirements and fees compared to standard savings accounts.
Can you take out money from a high-interest savings account?
Yes, you can make withdrawals from a HISA, but always check if the bank or credit union of your choice imposes withdrawal fees or limits the number of free withdrawals before you opt to withdraw any funds.
What’s the point of a high-interest savings account?
The elevated interest rate in a HISA enables your savings to grow more rapidly compared to traditional savings accounts. This makes HISAs an excellent choice for long-term financial goals.
Are high-interest savings accounts safe?
Yes, HISAs are generally safe, especially when they are offered by financial institutions that are members of the CDIC, which insures deposits up to $100,000.
How often is interest paid on a high-interest savings account?
Interest on a HISA is usually compounded daily or monthly and paid out monthly or annually, depending on the financial institution's policy. Always check the terms to understand how your interest will be calculated and paid.
Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.
