This article is part of Global News’ Home School series, which provides Canadians the basics they need to know about the housing market that were not taught in school.
Prospective homebuyers struggling to build up the down payment needed to break into Canada’s increasingly unaffordable housing market are often in need of every leg up they can get.
This month’s instalment of the Home School series takes a look at a new registered account that looks to make the process of saving up for a first home a little easier.
Pat Giles, vice-president of saving and investing at TD Bank, tells Global News that a first home savings account (FHSA) is an “absolute must-have” for would-be buyers thanks to the tax benefits that come with the savings vehicle.
“It’s really a no-brainer for any first-time homebuyers. That first home savings account is something you just have to get,” he says.
The federal government says that more than half a million Canadians had opened an FHSA as of January with the account on offer for less than a year.
But despite the opportunities an FHSA offers, how would-be buyers use the account can come with risks like any other investment strategy. Here are five things prospective homebuyers should know before they open their own FHSA.
The FHSA allows account owners to put as much as $8,000 in savings away annually, and up to $40,000 over five years. Contribution room starts growing the first year the FHSA is opened.
That money is tax-free on the way in and on the way out, meaning contributions can count as deductions on income tax and are not taxed when withdrawn for a down payment on a qualifying home.
Giles says the FHSA is “the best of both worlds,” with funds behaving like a registered retirement savings plan (RRSP) on the way in and a tax-free savings account (TFSA) on the way out.
Funds in the account can continue to grow tax-free for up to 15 years, at which point the funds have to be withdrawn or transferred to an RRSP. If withdrawn and not used towards a home purchase, that money is added to your taxable income for the year.
Some would-be buyers saving towards a home might not be able to reach the bar needed to buy a home in their desired neighbourhood, or could decide that homeownership ultimately isn’t for them.
Shannon Terrell, lead writer and spokesperson for NerdWallet Canada, says that Canadians interested in homeownership but aren’t sure if it’s for them should still open up the account and start building up their contribution room.
“We see so many tax benefits from this account that even if 15 years pass, the money is still yours. The investment gains are still yours,” she says. “We just need to be strategic about how we take them out of the account and what we do with them going forward.”
The first home savings account is not reserved to first-time buyers. You’re eligible to open an FHSA if you’re a Canadian resident aged 18 (19 in some provinces) or older, but younger than 71. You also must not have lived in a home owned by you or your spouse in the year that you open the account or any of the preceding four years.
Terrell explains that this means Canadians who owned their home but sold more than five years ago, or currently own the property but don’t live there as their principal residence, are qualified to open an FHSA.
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That opens the account up to anyone who owns and rents out a property but also rents themselves, for example.
An FHSA operates like other registered accounts, wherein the money can be held just in a high-interest savings account or as a vehicle for securities and other investments.
This gives the money inside the FHSA a chance to grow based on which investments you choose. But the kinds of securities a saver chooses will depend on how long they believe they have before they buy their home. For buyers who believe they have more than five years of time to let their savings growth towards a down payment, Giles says it’s reasonable to put that money in the stock market to realize longer-term gains that can ride out volatility.
“In those instances, it absolutely makes sense to participate in the market,” he says.
But buyers who may already be close to their savings goal and are only a year or two away from the purchase might not want to think twice before putting that money in mutual funds, Giles notes, given the risk that an individual pulls out their savings during a downturn in the market and falls short of their savings goals.
In these instances, or for savers that have a generally lower risk tolerance, an FHSA might be better suited with more conservative options: guaranteed investment certificates (GICs) or savings accounts with a set rate of interest.
“Everyone’s situation is different, and you have to take into account the time horizon,” Giles says.
An individual can open multiple FHSAs at different financial institutions, as long as that person doesn’t surpass annual or lifetime contribution limits for the accounts.
There’s no joint account option for the FHSA, meaning a couple can’t set up a single account with shared tax benefits.
However, funds from multiple FHSA accounts can be put towards the purchase of a single home. For some households, that means a maximum contribution limit of up to $80,000, plus any interest and investment gains, can go towards the down payment.
Down payments needed to buy the median home in Toronto and Vancouver were well over $200,000 in the final quarter of 2023, according to National Bank of Canada’s housing affordability index.
But typical condo properties in Canada’s two most expensive cities, and median homes outside those markets, are comparatively more affordable. Minimum down payment amounts range from just under $20,000 in Winnipeg or Quebec City to almost $70,000 in Hamilton, Ont., the bank said.
Homebuyers with an FHSA are also not limited to using that account to fund their purchase. The FHSA can be used in concert with funds from a TFSA as well as with the Home Buyers’ Plan (HBP).
The HBP allows individuals to draw down up to $35,000 tax-free from an RRSP towards a down payment, on the condition that the funds are paid back into the account over the course of 15 years.
Maximizing contribution room to an FHSA in a given year, in addition to contributing to an RRSP and TFSA, is not always realistic for aspiring homeowners, Giles notes. That’s especially true of FHSA holders, 60 per cent of whom at under the age of 30 at TD Bank, he says.
“I think it’s important to acknowledge at that stage in life you will have competing priorities on your dollars, both saving for the short term and saving for the long term. And so it is all about balance.”
Terrell adds that a down payment is not the only thing buyers need to prepare to be financially ready for a home.
Canadians should think about their “credit-worthiness,” as well, and make sure they’re paying down debt so that when they’re ready to buy and cash out their FHSA, that their lender will qualify them for the mortgage amount they need.
“That’s going to help lenders see you as a more viable candidate for the mortgage and potentially offer you a lower interest rate, which is going to save you even more money down the line,” she says.
Once someone opens an FHSA account, around tax season their lender will issue a T4FHSA slip with records of all contributions and transactions made in the previous tax year.
Individuals are then expected to fill out Schedule 15 on their income tax returns to log their deductible contributions and receive their tax refund, if applicable. The Canada Revenue Agency says this section of the return should be filled out even if no contributions were made to the account in the preceding tax year.
Contributions to the FHSA are generally tax deductible but transfers from the account to an RRSP are not.
An account holder can also choose not to claim FHSA deductions for the tax year they took place, and can be carried forward and claimed in future years if desired.