What is a high interest savings account?

A vacation, a new car, a house deposit or just extra cash for a rainy day — no matter what you’re saving for, a high interest savings account will help you get there.

Unlike a chequing account, a high interest savings account pays interest on every dollar you deposit, so your bank balance will grow without you having to do a thing.

In this guide we’ll look at how high interest savings accounts work, where to get the best rates and how to find the account that’s right for you.

What is a high interest savings account?

A high interest savings account is exactly that — an account that pays a much higher interest rate on your balance than a regular savings account or a chequing account.

That’s important because the higher the interest rate you get, the faster your balance will grow.

Also known as a high yield savings account, a high interest savings account generally comes with no monthly fees. These accounts are commonly offered by online-only banks and provide easy access to your money via online and mobile banking.

Compare high-interest savings accounts

Related: Our picks for the best high interest savings accounts in Canada

What you should know about high interest savings accounts

With some high interest savings accounts, the high interest rate you see advertised applies to every dollar you deposit — no strings attached. But that’s not always the case.

Some accounts come with terms and conditions that you have to satisfy to get that juicy rate being advertised. These include:

• Minimum deposit requirements. These accounts require you to deposit a certain amount each month in order to earn “bonus” interest. If you don’t deposit enough, a much lower “standard” interest rate will apply.
• Transaction requirements. Some accounts require you to perform specific transactions to earn the highest rate, such as getting your pay directly deposited into the account.
• Promo rates. Some accounts come with a high promotional interest rate that only applies for a short introductory period, such as 4 or 5 months. Once this period ends, the account reverts to a much lower standard rate.
• Withdrawal notice requirements. You may need to give the bank advance notice before making a withdrawal from your account.
• Tiered interest. The interest rate you get is sometimes determined based on a tiered system depending on the size of your account balance — the larger your balance, the higher your interest rate.

Before you apply to open any high interest savings account, check the fine print to find out if you need to jump through any hoops to get the maximum rate.

Big banks vs digital banks: Where to find the best high interest savings account rates

For many Canadians, a Big Five bank is all they know. If you’re the type of person who likes to “pick and stick” when managing your finances, you might have all your accounts, credit cards and loans with a single Big Five bank — maybe even the same bank you opened your first account with as a child.

But if you’re looking for the best interest rates, you’ll generally get much better saving power with a digital bank. These challenger banks are completely online with no physical branches, and they can offer significantly better rates compared to the major banks.

To give you an idea how much better, you can get an interest rate of:

• 3.5% with an EQ Bank 10 Day Notice Savings Account or 3.65% with a 30 Day Notice Savings Account
• 5% with KOHO Earn Interest
• 2.75% – 3.75% with a Wealthsimple Cash Account.\
• 4% on a Neo High Interest Savings Account
• 3.75% with a Laurentian Bank High Interest Savings Account
• 4.25% with a PC Financial PC Money Account

Savings accounts from traditional banks: What’s in a name?

Just because an account is named, “High Interest Savings Account,” that doesn’t necessarily mean it actually offers a high interest rate.

Traditional banks are pretty notorious for advertising high interest accounts that actually offer much lower rates than you can find elsewhere.

Compare the digital bank high interest savings account rates above to some of the accounts from the Big Five which, while they might sound like high interest savings accounts, don’t really pay a high rate of interest at all. Examples include:

• 0.01% wit the BMO Premium Rate Savings Account
• 0.05% with the TD High Interest Savings Account
• 0.01% with the Scotiabank Money Master Savings Account

That’s why it’s important to look past the account’s name and check how much interest you’ll earn on every dollar you deposit.

How can a high interest savings account help me reach my savings goals?

A high interest savings account can help you build a bigger bank balance in three easy steps.

Step 1: Make your first deposit

Start by making your first deposit to your account. Many high interest savings accounts have no minimum balance requirements, so you can start saving even if you’ve only got $5 to spare.

Step 2: Set up a regular deposit

Whenever you have some extra cash left over at the end of each pay cycle, transfer it to your high interest savings account.

To really give your savings a boost, set up a recurring transfer from your chequing account to your savings account. So if Monday is payday, you might want to set up a recurring transfer every Tuesday to send $100 of your pay to your savings account. You might be surprised just how quickly your balance increases.

Step 3: Earn interest on your interest

It’s not just your deposits that will help your balance grow — now it’s time for your account’s high interest rate to do its thing. Interest is usually calculated on your balance daily and paid out monthly. And savings accounts pay compound interest, allowing you to “earn interest on your interest” and grow your balance faster.

Regular savings account vs high interest savings account

Just how much of a savings boost can you get with a high interest savings account? Let’s look at a direct comparison between a regular savings account and a high interest savings account.

Mia has a spare $12,000 in her chequing account and wants to save a deposit for a house. She also plans to direct deposit $175 from her income into her savings account each week to help build her balance faster.

Mia’s Big Five Bank offers a regular savings account that pays 1.55% interest, but Mia decides to find out how much more she could save with a 4% high interest savings account from a digital bank.

As you can see in the table below, a high interest savings account will help Mia earn $4,685 more interest than a regular savings account over 5 years. That’s why shopping around for the highest available rate can make a big difference.

	Regular savings account	High interest savings account
Interest rate	1.55%	4%
Initial deposit	$12,000	$12,000
Weekly deposit	$175	$175
Interest earned after 5 years	$2,744	$7,429
Total account balance after 5 years	$60,244	$64,929

How taxes work on high interest savings accounts

You won’t need to pay tax on any deposits you make to a high interest savings account, as these are made using income you’ve already paid tax on. But the interest you earn from a high interest savings account is taxable in Canada.

You’ll need to include any interest you receive as part of your total income on your annual tax return. The rate at which you are taxed will then depend on the tax bracket you fall into.

However, you can avoid paying tax on your savings account by opening a tax-free savings account (TFSA) — find out more on how these accounts work below.

You can also learn more about your tax obligations in our guide to how savings account interest income is taxed.

What is a good high interest savings account?

There are plenty of high interest savings accounts to choose from, so how do you find one that offers good value? Keep the following factors in mind to help you select a good high interest savings account.

Your savings goals

What are you saving for? Do you have a specific goal in mind or do you just want to build up a rainy-day fund to help cover unexpected financial emergencies?

It’s also important to consider your saving time frame. If you have long-term savings goals, a high ongoing interest rate is a must. But if you’ve got a short-term goal of 6 months or less, an account with a high introductory promo rate might be a better choice.

Interest rate

The interest rate is the number-one factor to look at when choosing a savings account. The higher the interest rate, the faster your balance will grow.

Terms and conditions

If there are any specific terms and conditions you need to meet to get the highest interest rate, make sure they suit your needs. For example, if you need to deposit at least $2,000 per month to qualify for bonus interest, is that realistically doable with your current income?

Fees

The best high interest savings accounts have no monthly fees — after all, the last thing you want is a regular fee chipping away at your balance. Check the fine print to make sure there are any other fees that apply to specific transactions, such as if you exceed your monthly withdrawal limit.

Transactions and access to funds

It’s typically easy to manage your money via online and mobile banking, while some accounts even offer debit card access.

But while some accounts allow you to deposit and withdraw money at any time, others restrict the number of free transactions you can make per month — and that’s why the right account for you will depend on your needs.

For example, an account with no restrictions on monthly withdrawals will suit anyone who wants the flexibility of being able to access their money whenever they want. But if you want to avoid dipping into your savings as much as possible, an account with limited monthly transactions may be a better fit.

If opting for a digital bank, you may also want to cheque whether you can deposit cheques using a mobile banking app.

CDIC insurance

Look for a high interest savings account from a financial institution that is a Canada Deposit Insurance Corporation (CDIC) member. The CDIC ensures eligible deposits up to $100,000 at its member institutions, so you’ll be covered if your bank goes under.

Dive deeper: How to compare high interest savings accounts

Alternatives to high interest savings accounts

Not sure if a high interest savings account is right for you? Consider these alternatives.

Guaranteed investment certificates (GICs)

GICs are a low-risk type of investment that provides a guaranteed return on the money you deposit. You invest your money for a fixed period, and in return you earn a fixed rate of interest on your principal.

Traditional GICs are non-redeemable, which means your money is locked away for a set period and can’t be accessed until maturity. There are also redeemable and cashable GICs available, but these tend to have lower interest rates.

Dive deeper: Where to find the best GIC rates in Canada

Hybrid bank accounts

Recent years have seen the arrival of hybrid accounts that combine the competitive interest rate of a savings account with the convenient access to funds of a chequing account.

This allows you to perform all your day-to-day transactions like paying bills and making purchases, but at the same time your balance continues to earn interest.

Examples of hybrid accounts include the EQ Bank Personal Account, KOHO Earn Interest and the Wealthsimple Cash Account.

Related: Compare interest-earning chequing accounts

Tax-free savings accounts (TFSAs)

A TFSA provides a tax shelter for interest and income you earn from your investments. You’ll need to be at least 18 years old and have a valid SIN to open a TFSA — learn more about how they work in the next section.

What is a high interest TFSA savings account?

A high interest TFSA is an account that pays a higher interest rate than a regular TFSA. This high rate could be ongoing or it could be available for a limited promo period.

A high interest TFSA also offers all the tax benefits you’d expect from this type of account, so you won’t need to pay tax on the interest you earn.

You can use a TFSA like a regular savings account to earn interest on the money you deposit, but you can also use a TFSA to invest in GICs, stocks, ETFs and more.

However, there’s a limit to how much you can contribute to a TFSA each year, and you’ll need to pay a tax if you exceed your available contribution room.

Learn more in our full guide to TFSAs.

Bottom line

A high interest savings account is a very useful tool to help you reach your savings goals sooner. Earning a higher rate than you can get from a regular savings account can supercharge your savings, so compare accounts to find the best rate today.

Frequently asked questions

• Which bank has the highest savings interest rate in Canada?

  The Simplii Financial High Interest Savings Account offers an interest rate of 6.25%, but this is a promotional rate that only applies for the first 5 months after you open an account. If you're searching for the highest ongoing rate, you might want to check out the 5% offered by KOHO Earn Interest.

• How can I avoid tax on a savings account in Canada?

  You can avoid paying tax on interest you earn from a savings account by opening a TFSA (tax-free savings account). However, interest earned in regular, non-registered savings accounts is classed as taxable income and will be taxed at your marginal rate.

• High interest savings account vs GIC: which is better?

  It depends on your financial needs and savings time frame. High interest savings accounts tend to be more flexible than GICs, providing easy access to your funds whenever you need. Non-redeemable GICs require you to lock away your money for a fixed period, but they also allow you to lock in an attractive interest rate until maturity.

  Ultimately, consider the above factors when making your decision, then compare savings account and GIC interest rates side-by-side before choosing where to deposit your money.

• What are the downsides of high interest savings accounts?

  The main downside of high interest savings accounts is that interest rates fluctuate, so falling rates will reduce your account's interest-earning potential. Depending on the rate you get, your account may not be able to keep pace with inflation. Other potential drawbacks to consider include fees, transaction limits, and the fact that you may need to meet certain terms and conditions to qualify for the maximum interest rate.

• Where can I find the best high interest savings account rates in Canada?

  The best high interest savings account rates can generally be found at digital banks. While traditional banks also offer their own versions of high interest savings accounts, these generally only offer a high rate for a limited promo period or simply can't match the rates offered by online banks.