What Is A High-Interest Savings Account?

A HISA (also called a high-yield savings account) earns more interest on your money than a regular savings account. Interest rates usually range between 1% and 2.5%, although some high-interest savings accounts earn over 3%.

Many of today’s HISAs are available through online-only banks and credit unions. They don’t have physical branches, so these savings can be passed onto the consumer in the form of higher interest rates.

HISAs work like any other savings account, the difference is that they have better returns. You can use a HISA for a variety of savings goals, like paying for college, buying a car or making a down payment on a home.

When you deposit money, the bank pays interest on your account balance. You can access cash at any time, though most high-yield accounts only allow a certain number of withdrawals and transfers per month.

With a HISA, you can make many of the same transactions as a regular savings account. Banks often limit the number of monthly transactions since these accounts are for growing money, not spending it. Depending on the savings account, transactions can include:

• Deposits (cash and cheques)
• Withdrawals (banks or ATMs)
• Purchases (if linked to a debit card)
• Preauthorized payments (bills, subscriptions, loans, etc.)
• Transfers (between linked bank accounts)
• Interac e-Transfers (send and receive)

If you make a lot of transactions, a hybrid HISA (called a money market account) might be your best option. It combines chequing and high-interest savings in one account. It typically comes with a debit card and has low or no fees, unlimited transactions and competitive interest rates.

Few things in life are free, even when you’re saving money. Paying high fees can cancel out the interest your money earns. Review these common fees before choosing a HISA:

• Monthly Fees: Banks may charge a monthly service fee. Some accounts can waive these fees if you meet certain requirements.
• Transaction Fees: If your account has a limit on free transactions, you might be charged for each additional transaction.
• ATM Fees: When you use an ATM outside of your bank’s network to deposit or withdraw cash, there is usually a fee.
• NSF Fees: An NSF fee will apply for any payments or cheques declined because there isn’t enough money in your account.
• Other Fees: You may also be charged for stop payments, inactive accounts, paper statements, money orders, bank drafts, wire payments and other fees.

Some banks will waive fees if you maintain a minimum balance or receive a certain amount in direct deposits. You can also find HISAs that have no monthly fees.

Interest on a HISA is usually presented as an annual percentage yield (APY). APY refers to the amount of money (interest) you earn in a given year. The higher the APY, the faster your money grows.

APY includes compound interest, which is the money your bank pays on your balance and the interest you receive over time. Essentially, compound interest means you’re earning interest on your interest. HISA compound interest is usually calculated daily and paid into the account monthly.

Keep in mind that interest rates can change. Plus, some banks only pay a higher interest rate as a promotion on new accounts or if you maintain a minimum balance.

The main difference between a HISA and a regular savings account is the higher interest rate. Even a small increase can add up over time.

For example, let’s say you deposit $1,000 in a daily savings account that pays 1% interest. Assuming you don’t make regular contributions or withdraw any money, your account balance will be $1,010.05 after one year.

Over the same period, $1,000 in a high-interest savings account with a 3% APY will have a balance of $1,030.45. Contributing $100 every month brings the total up to $2,248.58. Do this for three more years, and you will have $6,227.14 in your account.

Try this exercise yourself using Forbes Advisor’s Compound Interest Calculator.

The best high-interest savings account in Canada will have a high APY and low fees or none at all. Some promotional rates can give you a head start on saving, but make sure the ongoing rate is still solid.

Currently, a Neo High-Interest Savings Account has a standard 4.00% APY. There are no minimum deposits or monthly fees, and you can open up to 10 accounts for all your savings goals. Link this account to a Neo Money Card and get up to 5% cash back, free transactions and ATM access wherever Mastercard is accepted.

Like any money you earn, interest generated on a high-interest savings account is considered taxable income by the CRA. The bank will send you a T5 every year, reflecting interest earned to put on your tax return. The only exception is if your HISA is a registered account, like a TSFA, RRSP, or RESP.

High-interest savings accounts are a great place to set aside funds for short to mid-term goals, like vacations or buying a house. However, depending on your goals, other options might make more sense for your financial situation, like the following:

Guaranteed Investment Certificate (GIC)

Instead of a variable APY, the bank pays a fixed interest rate (often 5% or more) on money held in GICs. However, your money is locked in for a set term of a few months or years. If you need access to cash, a high-yield savings account is a better option.

Tax-Free Savings Account (TFSA)

TFSAs are ideal for long-term savings. While there is a limit on contributions, you can use funds in a TFSA to invest in stocks, bonds, ETFs, GICs and mutual funds. Any money earned from your investments, like interest or dividends, is tax-free.

Money Market Account (MMA)

Compared to a HISA, money market accounts make your cash more convenient. You can spend, withdraw or transfer money for a nominal (or no) fee and earn a high interest rate on savings. The opening deposit for an MMA is usually more than a high-interest savings account.

While you can stash your cash in any savings account, you’re essentially losing money if the interest rate is below the rate of inflation. High-interest savings accounts help maintain the value of your money while it grows so you can reach your savings goals faster. Always check the APY, fees and any limits before you open a high-yield savings account.