Many Canadian financial institutions offer high-interest savings accounts. Discover how this type of bank account can help boost your saving power
» See our picks: Canada’s best high-interest savings accounts
What is a high-interest savings account?
Just like its name implies, a high-interest savings account is a bank account that offers interest rates that are higher than those you’d earn with a standard savings account. While regular savings accounts in Canada — especially those at the big five banks — offer low interest rates (often ranging from just 0.01% to 0.050%), high-interest accounts feature much more attractive rates (often 1% or higher) designed to encourage saving.
High-interest savings accounts have become more popular in Canada as online-only banks entered the scene. With few or no physical locations, these digital banks can offer interest rates well above those advertised by Canada’s more traditional banks.
How does a high-interest savings account work?
Any savings account is a way to store money you don’t immediately need. Banks and credit unions may use the money their clients hold in savings accounts to lend to other clients (though of course, you have access to your funds at any time). In return, the bank pays you interest.
A high-interest savings account simply offers a more attractive interest rate than other savings accounts that may be offered by the institution. The interest rate is applied to the entire balance in your account and is calculated daily but paid out monthly. Note, however, that some banks may only pay a higher interest rate if you maintain a minimum balance.
» LEARN: How does compound interest work?
A high-interest savings account works almost exactly like a normal savings account: you can typically make deposits and withdrawals whenever you want, and interest is normally paid monthly. With a high-interest savings account, you can usually do all of the same transactions you might do with a regular savings account, including paying bills, making deposits and withdrawals, transferring money and more.
Be aware, however, that it can be more difficult to withdraw and spend money from the high-interest savings accounts offered by some online-only banks, especially if they don’t offer chequing services, debit cards or ATMs. Be sure you understand the available methods for accessing your money when considering a high-interest savings account.
It’s important not to assume that just because a bank account is called a high-interest savings account, it offers better-than-average interest rates. As online-only banks have become more popular, Canada’s traditional banks have also started offering savings accounts advertised as “high-interest.” For the most part, however, the interest rates offered by traditional banks are lower than those offered by digital banks and often come with fees or minimum account balances.
Digital banks tend to be able to offer better rates to their clients because they have much lower operating costs than brick-and-mortar banks and can thus share those savings with clients.
Temporary promos vs. high-interest savings accounts
Sometimes banks will temporarily offer elevated interest rates as a way to encourage customers to open a savings account. These limited-time rates are enticing but usually only last for a few months before returning to the account’s low standard rates.
It’s important to balance the benefits of taking advantage of a limited-time rate offer versus staying with a bank that offers a solid ongoing interest rate.
» MORE: How to switch banks
Alternatives to a high-interest savings account
Guaranteed Investment Certificate
If you want your money to grow even faster, but don’t want the risk of an investment account, a good savings vehicle option is a guaranteed investment certificate (GIC). GICs present very little risk and often have higher interest rates than savings accounts. The downside of a GIC is that you usually have to keep your money locked in for a set period of time ( from three months to as long as 10 years). It’s best not to go with a GIC unless you’re sure you won’t need access to those funds until the GIC matures.
Tax-Free Savings Account
Another option is a tax-free savings account (TFSA), which allows you to avoid taxes on interest earnings. Many banks offer high-interest tax-free savings accounts. These accounts come with contribution limits and rules about withdrawals, but they can be a good option for saving towards retirement or other longer-term goals.
FAQs for High-Interest Savings Account
Interest rates in Canada change based on the Bank of Canada’s interest rates. Right now, competitive high-interest savings accounts are approximately offering interest rates from .070% to 5.75%.
The tax-free withdrawals of a TFSA offer more flexibility, but the tax-deferred contributions of an RRSP are great for retirement. The type of account you choose will depend on your savings goals.