Not all savings accounts are the same. Sure, they’re all places you can put aside money to save it. But interest rates can differ considerably.
A traditional savings account – a standard interest rate savings account – is what we’re most familiar with. Almost everyone has one. It’s the kind of savings account your bank automatically adds on when you open a chequing account.
Then there are High Interest Savings Accounts (HISAs) – also known as High Yield Savings Accounts (HYSAs). These are a little different. And they’ve become increasingly popular in Canada as a way to earn a little extra from your savings.
Let’s explore both traditional savings accounts and HISAs, and compare the pros and cons of each.
What is a standard interest rate savings account?
A standard, traditional savings account is probably what you probably think of when you think of a savings account. A lot of us have had a traditional savings account since we were kids.
Savings accounts are simple. There are minimal requirements to sign up, they’re readily approved by banks, and they offer a basic one-size-fits-all approach to saving. You’ll usually have a savings account linked to your primary chequing account, making it super convenient to move money from one to the other, setting aside some extra cash into your savings for a rainy day, or moving it back into your chequing when you have something to spend it on.
Savings accounts generally accrue interest on the money you have in the account. But traditional savings accounts earn very low interest. Like, very low. Like, the sort of low that’s less than 0.3%. For reference, at 0.3% interest, $1,000 in savings would earn $3, or $10,000 would earn $30. Not great.
For most people, though, this is just a place to stash money you want away to avoid spending it. This type of savings account is great for savings towards short or even medium term goals, like a vacation, a new guitar, golf clubs, or those fancy new shoes you saw but can’t afford just yet. This is definitely not the place to save towards retirement.
Traditional savings accounts are super flexible, have few fees, and are convenient to transfer money in and out of the account without penalty. Any interest you earn in a savings account needs to be reported as income and will be taxed when you file your taxes. In most cases – due to their rather paltry interest rates – it won’t be a large tax bill.
What is a High Interest (or High Yield) Savings Account?
A HISA (or HYSA) is another kind of savings account – one that offers, as the name suggests, higher interest. These savings accounts can offer interest rates 10x higher than traditional savings accounts, and sometimes even more than that. So, instead of 0.3% interest, a HISA might offer 3.0%. So, on $10,000 savings, that’s now $300 in accrued interest.
High Interest Savings Accounts operate more or less the same as traditional savings accounts. The big benefit of HISAs over traditional savings accounts is the higher interest rate, which helps you earn more, faster.
HISAs, like traditional savings accounts, are great for putting aside money you don’t want to spend right now. And they’re fantastic for mid-term savings, like buying a car, or possibly even a downpayment on a home. Similar to traditional savings, HISAs are not the best place to try to save for retirement either – there are better investment vehicles for that.
High Interest (or High Yield) Savings Accounts are available through most banks and credit unions in Canada. Like traditional savings accounts, any interest earned is taxable.
How does a High Interest Savings Account work?
To get started, setting up a HISA is pretty easy. It can be done at most banks and credit unions, either in-person or online. You’ll just need to prove you’re a Canadian resident, have a Social Insurance Number, and be the age of majority.
In terms of putting money in your HISA, some financial institutions require a minimum opening deposit and need you to maintain a minimum balance in your HISA too (although plenty don’t require this).
Interest is compounded, meaning it’s calculated based on both the initial deposit and any accumulated interest. So, everything in your account is earning interest, which is accrued and calculated daily. The longer you leave your money in – and the more you add to your account – the more you’re going to earn. This should incentivize you to make the most of your savings.
High Interest Savings Accounts often have a few more rules than traditional savings accounts. In addition to (sometimes) having minimum balance requirements, some will charge a fee for every transaction or limit your transactions per month, and processing times for transactions can be longer as well.
The pros and cons of High Interest Savings Accounts and standard savings accounts
Pros of High Interest Savings Accounts
Higher Interest Rates
With a High Interest (also called a High Yield) Savings Account, you earn considerably more interest than you would in a traditional standard savings account – so you save more, faster. HISAs can earn 10x the interest rate (or more) of a traditional savings account.
Encourage More Saving
With a higher interest rate, you see the savings accumulate more quickly. This can encourage you to add more to your savings. The more you add, the more you earn. This can create great savings habits.
HISAs are protected with federal or provincial insurance coverage. Most HISAs held with banks are covered federally by the CDIC (Canadian Deposit Insurance Corporation) for up to $100,000. Others (in credit unions) are covered by provincial deposit insurers.
Cons of High Interest Savings Accounts
There are a few more rules with a HISA than with a traditional savings account. Some require a minimum deposit to open the account and also some require you to have a minimum balance in your account to keep it active. Many HISAs don’t have these requirements, though.
Restrictions on transactions
It depends on the HISA, but some charge transaction fees (charging $5 per transaction, for example) or limit how many transactions you can make in and out of your account per month.
Pros of traditional savings accounts
Traditional savings accounts couldn’t be easier to use. Because you can access your account online or through an app, it’s easy to add or withdraw funds and move money from one account to another. Often there are no fees for transactions nor restrictions for moving money around.
Great for short term goals
Traditional savings accounts are great for putting money aside, essentially as a holding account. Sometimes, it’s not about earning interest, it’s just about stashing the money somewhere safe so you don ’t accidentally spend it.
Cons of traditional savings accounts
Lower interest rates
The main drawback of a traditional savings account is its low, low interest rate. Interest rates for standard savings accounts are usually between 0.1-0.3%. With this level of interest, you’re not going to grow much money in your account. That’s why traditional savings accounts are best used as short-term holding accounts.
What To Look for in a High Interest Savings Account
When assessing your options for High Interest Savings Accounts, there are some important things to consider:
You want to earn the most possible, that’s why you choose a HISA. Many banks offer special sign-up promotional rates that can seem really attractive (as high as 6-7%) but be careful of these as they usually only last a few months and then the rate drops down – sometimes as low as 0.4% or similar. Look out for HISAs offering long-term rates around 3-4% as a good bet.
Access and penalties
Look around to find out the HISA that will suit you best. If you make a lot of transactions and like to move money around, you want an account that won’t penalize you or restrict your transactions. Or if you know you won’t always keep a large amount in your HISA, you may want to steer clear of HISAs that require a high minimum balance.
Research the bank, credit union, or online financial services company you want to join for your HISA. It might be that the best HISA for you is one that’s offered by one of the smaller or less recognized institutions. Read company reviews and find out how they operate. Just because you may not have heard the name of a particular financial institution, doesn’t mean they won’t be the best fit for you. There are plenty of great banks and credit unions in Canada beyond the big banks.
Open a HISA with KOHO
KOHO offers a range of innovative financial products and services to help you save and learn more about financial stability. If you’re interested in opening a HISA, you can explore KOHO’s High Interest Savings Accounts.
Sam Boyer spends, invests, budgets, and writes. He enjoys writing about things he wishes he’d learned earlier — like spending, investing, and budgeting. A journalist originally from New Zealand, Sam has written extensively about consumer affairs, insurance, travel, health, and crime.