Saving for a First Home? Here’s a Better Option Than RRSPs

By Josh Sherman | 4 minute read

The deadline to contribute to your Registered Retirement Savings Plan for the 2022 tax year is fast approaching, but a leading finance expert has some advice for anyone who’s starting to save for a home down payment: Wait for the First Home Savings Account instead.

Although the popular Home Buyers’ Plan lets first-time buyers withdraw up to $35,000 from an RRSP for the purchase of their first home, Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management, says the soon-to-be-available FHSA will be the better bet. “The First Home Savings Account is going to be the way to go,” Golombek tells Wahi.

Coming Soon: First Home Savings Account  

The FHSA, a new type of registered tax-free account announced in Canada’s 2022 budget, is expected to be ready for first-time homebuyers this spring. When it is, homebuyer hopefuls will be able to contribute up to $8,000 per year to an overall maximum of $40,000 for the eventual purchase of a first home, which you must then live in.

Golombek says one of the main advantages of the FHSA over the Home Buyers’ Plan is that the money you contribute is never taxed if it’s used to purchase a home, much like with a Tax-Free Savings Account. Withdrawals through the Home Buyers’ Plan aren’t taxed either. But that money must be paid back to your RRSP within a 15-year period and, when it is eventually withdrawn for retirement, it will be taxed.

As with an RRSP, any FHSA contributions are tax-deductible. “You get the benefits of the RRSP and the benefits of the TFSA, together,” Golombek says of the FHSA. If you don’t buy a home within 15 years, FHSA funds can be transferred tax-free to an RRSP or Registered Retirement Income Fund or withdrawn on a taxable basis.) 

If you can only choose one account to help cobble together a downpayment, pick the FHSA, Golombek suggests. However, he notes, an FHSA can, if needed, be used in conjunction with the Home Buyers’ Plan and as well as a TFSA. 

This is especially beneficial in an environment of higher interest rates — and in Canada’s priciest real estate markets. Taking advantage of all three accounts could help you make a larger down payment, meaning the mortgage amount that you’re paying interest on is smaller.

Take a Balanced Approach  

Using RRSPs will continue to remain an attractive option for some homebuyers. For instance, if you’re in the market for a home today, obviously the FHSA isn’t yet an option (and you’d need time to build up your savings anyways). Meanwhile, those hoping to make the largest downpayment possible may want to take advantage of every program possible.

However, when budgeting for a home purchase and dipping into savings meant for retirement, Golombek says you need to strike a balance. “You really need to do a balance between retirement savings and home-ownership,” he explains.

“I have no problem tapping into the RRSP for that downpayment, because how else are you going to get it? That’s not an issue,” he continues. “What I have a concern with is that people stretch themselves so much that when they carry a mortgage they’ve saved nothing for retirement,” Golombek adds.

It’s important to not only have a repayment plan for what you’ve withdrawn from your RRSP but also to continue to make additional contributions to the savings plan. 

“The Biggest Problem People Have”

Another tip: Know the rules. For example, many people don’t realize the implications that something like moving in with a partner can have on your eligibility for the Home Buyers’ Plan. 

“It gets a little tricky if you get married or live common-law, because you can actually be disqualified if your spouse or partner owns their own home — even if you don’t own it, even if your name’s not on title,” Golombek explains.

For tax purposes, you’re considered common law if you’ve lived with a partner for 12 months. That catches some people off guard. A number of Golombek’s clients have unwittingly disqualified themselves from the Home Buyers’ Plan by moving in with their partner, who already owns a home.

First-time homebuyer couples living under one roof can each contribute their RRSPs towards a future purchase together, upping the maximum Home Buyers’ Plan amount to $70,000. However, if one of the two owns the couple’s current residence, neither can participate in the program. “It’s the biggest problem that people have,” says Golombek.