Are you dreaming of owning your first home? Putting aside money for a down payment can be challenging, but fortunately there are savings options designed specifically to help you achieve this goal. In this article, we will touch on some of the benefits and features of the various savings tools available to Canadians, including the relatively new First Home Savings Account (FHSA), introduced in April of 2023.
What is a First Home Savings Account (FHSA)?
The FHSA is a specialized, registered savings plan available to Canadians, specifically designed for the purpose of buying their first home. An FHSA could be considered a hybrid version of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Similar to a TFSA, the FHSA allows your money to grow tax-free, and without being taxed at the time of withdrawal. Coincidentally, like an RRSP, the funds contributed to an FHSA can be tax deductible.
The process of withdrawing funds from an FHSA has specific requirements and conditions. For example, the withdrawal can only be used for the purpose of purchasing or building a qualifying home, and you may need to provide documentation to prove eligibility.
One of the key benefits of the FHSA is the tax advantage it offers. The money you save in an FHSA can grow faster than in a regular savings account, where you are subject to taxation on the interest earned. When combined strategically with a RRSP and a TFSA, an FHSA can further enhance your saving power and potential.
The Pros and Cons of RRSPs vs. FHSAs
First-time home buyers can use up to $35,000 from their RRSP savings towards a down payment. They then have up to 15 years to pay back the amount withdrawn before being taxed. The repayments only take effect at the start of the second year following the home purchase. The disadvantage of the RRSP is that the money must be in the account for a minimum of 90 days before it can be withdrawn.
An aspiring homeowner can contribute a maximum of $8,000 a year to an FHSA, up to a lifetime limit of $40,000. Once the account is created, the holder has 15 years to use the savings, after which time the account must be closed and the funds, if unused, may be subject to taxes.
Depending on the situation, it might be better to choose the FHSA rather than use the RRSP to fund a down payment. However, in some cases, a combination of the two might prove to be the ideal solution, as long as you meet all the requirements at the time of each withdrawal.
In addition to the tax advantages, an FHSA also provides incentives and grants to further boost your savings. For example, the Government of Canada offers a First-Time Home Buyers’ Tax Credit that allows eligible individuals to claim a non-refundable tax credit on closing costs associated with purchasing a home. FHSA holders can also take advantage of various government-funded programs and grants to assist with their down payment.
Flexible Saving Options
An FHSA offers flexible saving options to suit your financial situation and goals. You can choose to contribute a lump-sum amount or make regular contributions, depending on what works best for you. Some financial institutions may also offer the option to invest your FHSA funds in various investment products to potentially achieve higher returns over the long term. It's important to review the investment options and associated risks before making any investment decisions.
Eligibility Criteria
To be eligible to use an FHSA, you must be a Canadian resident, at least 18 years old, and a first-time home buyer. The definition of a first-time home buyer can vary, so it's essential to consult with your financial institution to determine if you meet the eligibility requirements.
Making the Dream a Reality
Becoming a homeowner is a significant milestone in one's life, and these various tools provide a valuable opportunity to make that dream come true. It's essential to carefully evaluate the terms and conditions of each option offered by different financial and wealth management institutions to determine the best fit for your individual needs.
Start saving for your dream home today and turn your home ownership aspirations into a reality! At TEAM BROADY, we hold a special place in our hearts for putting new buyers into their first home. If you would like to start the process of owning your first home or if you know anyone who is thinking about buying or selling a property, don’t hesitate to reach out to us today, we can be reached at 514-613-2988 or by email at info@teambroady.ca.