And if you’re early on in your career, you may still be paying off student debts, which only adds to that daunting feeling. But there is good news! In 2022, the government introduced the Tax-Free First Home Savings Account (FHSA) to help Canadians save faster and turn their home ownership dreams into reality.
The FHSA is a new registered account designed to help qualifying first-time home buyers save for their first home. Eligible individuals can contribute up to $8,000 per year to a maximum of $40,000. Similar to a Registered Retirement Savings Plan (RRSP), contributions are tax-deductible. Similar to a Tax-Free Savings Account (TFSA), qualifying withdrawals are tax-free.
To open an account, you must be a Canadian resident between 18 and 71 years old and a first-time home buyer (meaning you or your spouse or common-law partner cannot own a home in the current year before the account is opened or in any of the four preceding calendar years).
If you have home ownership goals on your mind, the following steps can put you on the right track to saving for a down payment.
1. Consider when to open an FHSA. Timing is everything. Your contribution limits begin the calendar year that your FHSA is opened. You want to open one soon enough to maximize your allowable contributions (which is a maximum of $40,000) but not too soon where time runs out before you’re ready to purchase a new home. You are only able to have an FHSA for a period of 15 years (or by the end of the calendar year in which you turn 71 – whichever comes first).
If you think you may not buy a home in that timeframe, you may consider waiting to open an FHSA and save to another account type instead. On the other hand, if you think home ownership is 15 years or sooner, then you would be wise to open one as soon as possible to start accumulating contribution room. You can carry forward up to $8,000 of unused room to the following year.
2. Determine your savings goal. Start by defining specific and achievable home ownership goals. What type of property are you looking to purchase? A house, condo, or maybe a townhouse? Where do you want to live? Research locations and property prices for different types of homes in the area to figure out how much you’ll need to save. Having a clear vision will help you stay focused and motivated throughout the saving process.
3. Create a savings plan. Assess your current financial position, including income, expenses, and debts. Spend some time diligently tracking your monthly income and expenses. Are there some areas where you could cut out unnecessary spending to put more funds toward your savings goal? Skipping a daily Starbucks habit can really add up! And breaking your budget down into smaller, bite-size amounts can help make it easier to achieve. Trying to save $10,000 sounds hard but putting away $150 a week sounds much easier.
4. Choose the right investment types. You can hold a variety of investments in your FHSA and choosing the right mix, by considering your time horizon, objectives, and risk tolerance, can help you maximize your tax-free growth. Your FHSA can be invested in high-interest savings accounts, GICs, mutual funds, and more.
5. Combine the FHSA with other registered plans. Using the FHSA in combination with a TFSA and RRSP Home Buyers Plan (HBP) lets you take advantage of the contribution limits and tax benefits of both types of accounts. This can really add up to work in your favour.
6. Seek professional advice. It sounds simple enough, but this is an important step and one that shouldn’t be overlooked, especially for educators, as their situation is unique when it comes to saving and investing. You might be surprised how much the right educator-specific advice can help when it comes to reaching your savings goals.
The following example shows how a young couple, Mike and Angela, who are both first-time homebuyers, could contribute to their FHSA over five years to save for a down payment for a condo in Hamilton, Ontario. Of course, your savings plan may differ depending on where you want to live and the type of property you are looking to purchase.
|Down payment:||$100,000 (20%)|
|Number of years to save:||5 years|
|Annual savings needed:||$20,000|
|Weekly savings needed:||$384.62|
This example is for illustrative purposes only. Actual savings would vary on an individual basis.
Contributing the maximum $40,000 each into their respective FHSAs means they’ll need to save an additional $20,000 in other account types such as their RRSP or TFSA. If they choose to save extra to their RRSP, they can take advantage of the Home Buyers Plan, but keep in mind that any amount withdrawn would need to be repaid within 15 years.
Continuing from the example above, here is how Mike and Angela might save using a combination of the FHSA, an RRSP, and a TFSA over 5 years:
|Type of account||Savings needed||Weekly contributions (per person)|
|FHSA||$80,000 ($40,000 each)||$153.84|
|RRSP (HBP)||$10,000 ($5,000 each)||$19.23|
|TFSA||$10,000 ($5,000 each)||$19.23|
|Total:||$100,000 ($50,000 each)||$192.30|
Keep in mind that this simplified example does not consider investment earnings which would contribute to their overall savings amount.