Back

How do High Interest Savings Accounts Work?

6 min read

Quan Vu

Written By

Quan Vu

How do High Interest Savings Accounts Work?

You've probably heard people talking about "high interest savings accounts" and wondered what the fuss is about. Maybe you're tired of seeing your money earn practically nothing in your regular savings account, or you're looking for a safe place to grow your emergency fund without the risks of investing.

A high interest savings account (HISA) is simply a savings account that pays significantly more interest than traditional bank savings accounts.

While regular savings accounts might pay 0.01-0.05% annually, high interest savings accounts typically offer rates between 2.00-5.00%, helping your money grow much faster while keeping it completely safe and accessible.

How high interest savings accounts work

High interest savings accounts work exactly like regular savings accounts, but with one key difference: they pay you significantly more for keeping your money with them.

The basics:

  • You deposit money into the account

  • The bank pays you interest on your balance (usually calculated daily and paid monthly)

  • You can withdraw or add money whenever you need to

  • Your deposits are insured by CDIC (Canada Deposit Insurance Corporation)

  • Interest earnings are added to your account regularly, where they also start earning interest (compound growth)

Example in real numbers: If you have $5,000 in a regular bank account earning 0.05%, you'd earn about $2.50 per year. Put that same $5,000 in a high interest savings account earning 4.00%, and you'd earn $200 annually – that's 80 times more money for doing absolutely nothing different.

Why save with a KOHO account?

Think you can’t earn more on your balance? Think again. KOHO offers some of the best high interest saving rates in Canada, with up to 4% interest on every dollar. Your money works harder here, earning returns daily and landing in your account every month.

Why banks offer high interest savings accounts

You might wonder: if banks can afford to pay 4%, why don't they pay that on all savings accounts?

The answer comes down to business strategy:

Online-focused banks have lower overhead costs (no expensive branch networks) and pass those savings to customers through higher interest rates.

Competition for deposits: Banks need customer deposits to lend money to other customers. Offering attractive rates helps them compete for your business.

Customer acquisition: High rates attract new customers who often use additional profitable services like loans, credit cards, or investment products.

Different profit models: Some banks make money through other services and use attractive savings rates as a loss leader to build relationships.

Types of high interest savings accounts

Traditional Bank: Major banks like RBC, TD, and Scotiabank offer high interest options, though rates are usually lower than online alternatives. You get the security of established institutions with branch access.

Credit Union: Member-owned credit unions often offer competitive rates and personalized service, though availability may be limited by geography or membership requirements.

Promotional Rate Accounts: Some banks offer temporarily high rates (like 5.00% for 6 months) to attract new customers, then rates drop to regular levels.

Key benefits of high interest savings accounts

Significantly Higher Returns: Your money grows much faster than in regular savings accounts while remaining completely safe.

Complete Safety: Unlike investments, your principal is guaranteed and protected by deposit insurance. You'll never lose money due to market fluctuations.

Flexibility and Access: Unlike GICs or other locked-in investments, you can access your money whenever you need it without penalties.

Compound Interest: Your interest earnings also earn interest, creating a snowball effect where your money grows faster over time.

No Investment Knowledge Required: You don't need to understand markets, pick stocks, or make complex decisions – just deposit money and watch it grow.

Predictable Returns: You know exactly what you'll earn, making it easy to plan and budget for future goals.

What to watch out for

Promotional Rates: That attractive 5.00% rate might only last 6 months before dropping to 1.50%. Always check what the ongoing rate will be.

Balance Requirements: Some accounts require minimum balances to earn advertised rates or avoid fees. Make sure you can meet these requirements consistently.

Transaction Limits: Many limit the number of withdrawals or transfers per month. Exceeding these limits might result in fees.

Geographic Restrictions: Some credit unions or regional banks may only serve residents of specific provinces.

Tax Implications: Interest earned is taxable income in Canada, unlike growth within TFSAs which is tax-free.

Who should use high interest savings accounts

Perfect for:

  • Emergency fund (3-6 months of expenses)

  • Short-term savings goals (vacation, car down payment, home renovations)

  • Money you might need within 1-5 years

  • Conservative investors who prioritize safety over maximum returns

  • Anyone wanting better returns without complexity or risk

Getting started with high interest savings

The hardest part about high interest savings accounts is often just getting started.

Here's how to make the transition smooth:

  1. Calculate your current earnings: See how much your regular savings account pays annually

  2. Research your options: Compare rates, fees, and features from multiple providers

  3. Start small: You don't need thousands to begin – even $100 earns more in a HISA than a regular account

  4. Set up automatic transfers: Make saving effortless by automatically moving money from chequing to your HISA

  5. Monitor and optimize: Check periodically to ensure you're still getting competitive rates

Your money deserves better

High interest savings accounts aren't complicated financial products – they're simply better versions of regular savings accounts that pay you fairly for keeping money with them.

In an era where every dollar counts, earning 80-100 times more interest is one of the easiest ways to improve your financial situation without any additional risk or effort.

The question isn't whether you should use a high interest savings account – it's why you'd choose to earn less when better options are readily available.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!

About the author

Quan works as a Junior SEO Specialist, helping websites grow through organic search. He loves the world of finance and investing. When he’s not working, he stays active at the gym, trains Muay Thai, plays soccer, and goes swimming.

Read more about this author