There was a time not too long ago when I told clients to have fun when buying their first home. I’d tell them to take their time, really get a feel for their living space. I still think that buying a home should be a positive experience but the changes to the housing market over the last few years has certainly spoiled the mood.
For those wondering, I’ve stopped telling people that because it’s become terrible advice.
There is some good news however, the First Home Savings Account (FSHA) is now available, and I must say there’s an incredible amount of financial horsepower in this vehicle. So I thought I’d take this month’s Buzz on Finance to talk about this new tool. It’s not going to make the housing market any less competitive, but it’s going to help with saving up for that first downpayment
Great News For First Time Home Buyers
For a lot of registered accounts there’s a give and take, in a previous article I took a look at comparing the Tax-Free Savings Account (TFSA) with the Registered Retirement Savings Account (RRSP). With the FSHA, there’s no real competition, there’s a lot of upside to using it, and there’s not a lot of downside. Which makes it pretty unique, but it’s still important to understand it.
There’s an $8,000 annual contribution limit to the FHSA, that’s an individual limit. For couples that means they could be contributing $16,000 each year. Now here’s where it gets really powerful, those contributions are tax deductible. So they go on your tax return the same way an RRSP contribution does. So long as you take those contributions out for a qualified withdrawal, you don’t pay taxes when that money comes out. So you get a tax deduction when it goes in, and so long as you use it to buy your first home that money doesn’t get taxed later.
That’s really really good.
Who can use it?
A name like First Home Savings Account might imply you can only use it to buy your very first home. However, that’s not the case! You just need to have not owned a house this year, and in the previous four calendar years, so for 2023, if you owned a house in 2018 or earlier but not 2019 to present, you could use the FSHA. The rule would apply to you or your spouse. So even if you didn’t own a house for those years but your spouse did you wouldn’t be eligible.
Like anything the government does the rules are complex, but the important thing to remember is that having owned a house in the past doesn’t immediately disqualify you from using the FSHA.
Like the Home Buyers’ Plan but Better!
Anyone that’s used their RRSP account to fund a downpayment is familiar with the Home Buyers’ Plan (HBP.) This plan, which still exists and you can use alongside an FSHA, allows you to withdraw money from an RRSP account, but you need to either pay that money back to your RRSP over fifteen years, or pay taxes on the withdrawal.
With the FSHA, you don’t need to make any contributions back to it, and you can also transfer money from an RRSP into an FSHA. You won’t get a tax deduction again, as you got it when you contributed to the RRSP, but it still comes out of the FSHA tax free. If you were looking at using an HBP withdrawal, the FSHA is going to give you more flexibility. They can also stack, the maximum HBP withdrawal is $35,000 per person, and the lifetime maximum contribution to the FSHA is $40,000. Over the next few years this is going to make saving for, and then using a downpayment a lot easier.
Working that RRSP Transfer
You can directly transfer money from your RRSP into your FSHA, if you’ve already got $8,000 in your RRSP you can transfer that over now into your FSHA, and you can do it each year until you hit that lifetime contribution limit of $40,000. If you don’t end up needing to use the full amount, or your situation changes, you can also transfer money from your FSHA back to an RRSP. That gives you a lot of flexibility, and even if you don’t end up using this account to buy a home, you can still transfer it into your RRSP for long term savings.
It’s More Then Just a Savings Account
One of the more common misunderstandings of TFSAs, is because they say savings account, they can only be used like a savings account. A TFSA, much like an FSHA, can hold many types of financial products and investments. Though you should be very careful about how you handle your downpayment you have more at your disposal then just a savings account, a GIC could be a great option if it makes sense for you. If you’re thinking of investing in an FHSA, make sure you have a good handle on your time horizon, no one wants the market to take away their downpayment!
They’re Still Brand New
Financial Institutions are still rolling out FHSAs, they were only officially launched by the government on April 1st. If you’re not able find all of the info you want from your financial institution of choice here’s a link to the Government of Canada’s page.
If buying your first home is something that feels very out of reach right now then I hope you look into the FHSA. It’s not an easy time to buy your first home but this is a very powerful tool that will make it much easier to get that downpayment together.
Until next month, happy saving!
Laura Whiteland is a CERTIFIED FINANCIAL PLANNER® and Chartered Investment Manager® Professional, she is the owner of Inclusive Financial Planning, a fee-only financial planner. Laura also hosts Stress Free Finance, a podcast dedicated to taking the stress out of personal finance.
This article is intended as general financial information and should not be construed as personalized financial advice.