Canada’s First Home Savings Account

By Stuart Foxman 

It’s not always easy to save for life’s major goals. That’s why there are special tax-friendly vehicles for putting away money for retirement (RRSP) and your children’s education (RESP). But what about a tool to save for a home?

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A new one is coming in Canada in 2023, called the  Tax-Free First Home Savings Account (FHSA). The federal government introduced it in its 2022 budget, and released draft legislation for this registered plan in August. The FHSA will give Canadians the ability to save a sizeable chunk, on a tax-free basis, towards buying their first home.

This new tool combines the tax break features of both an RRSP and a Tax-Free Savings Account (TFSA), so there are advantages going in and coming out. Just as with an RRSP, contributions will be tax-deductible. And as with a TFSA, any withdrawals, including the growth of investment income, will be non-taxable.

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The FHSA will have an $8,000 annual contribution limit, with a lifetime cap of $40,000. “Every little bit helps,” says Andrew Perrie, a REALTOR® at Revel Realty Inc. in Niagara-on-the-Lake.

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“This tax-free shelter for buyers’ hard-earned money will help bring back confidence for individuals looking to get into the market,” Perrie continues. “Being able to put away $8,000 annually in a secured tax-free account is quite substantial for first-time homebuyers. Knowing they can access this when an opportunity to get into the housing market arises is huge.”

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An FHSA is available to people who are at least 18, a resident of Canada, and who haven’t owned a home in the year that the account opens or the previous four calendar years. This applies to primary residences only, not investment or vacation properties.

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Any Canadian financial institution that issues RRSPs and TFSAs (i.e. banks, trust companies, life insurance companies and credit unions) can also issue FHSAs. An FHSA can hold the same wide range of qualified investments as a TFSA, including mutual funds, publicly-traded securities, exchange-traded funds, government and corporate bonds, and guaranteed investment certificates.

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While the annual contribution limit is $8,000, you can carry over unused portions. That room accumulates as soon as you open an FHSA. So if you contribute, for example, $4,000 to one in 2023, you can contribute up to $12,000 in 2024 ($8,000 plus the unused $4,000 from the previous year).

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There’s added flexibility as well. You can also hold more than one FHSA, and transfer funds between them, as long as the total amounts across multiple FHSAs don’t exceed the $40,000 per person lifetime limit. You can also transfer funds from an RRSP into an FHSA (within the FHSA contribution limits). That’s considered a tax-free withdrawal from an RRSP.

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“This will give new buyers more options when looking to save for the purchase of their first home,” says Karlyn Eacrett, a Sales Representative with Keller Williams Real Estate Associates in Mississauga.

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When to Open an FHSA

Canadians can keep an FHSA account open for 15 years or until they turn 71, whichever comes first.

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When should a prospective home buyer launch an FHSA? “As soon as possible,” says Perrie. “You never know when the right opportunity presents itself, and it’s always good to get a head start.”

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Given the annual limit, you can’t fund the FHSA in one lump sum. “To take full advantage, there needs to be a savings plan set in place prior to purchasing,” says Joanna Lang, a managing partner/mortgage agent at Keller Williams Edge in Burlington.

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She suggests starting an FHSA, at a minimum, five years prior to purchasing a first home. That would enable the full $40,000 of savings, in theory, if someone could max it out every year.

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To be strategic and make contributions hurt less, it’s prudent to get time on your side. Sock away money early and, hopefully, watch it grow. “Given our current economic climate, I think an FHSA should be opened on a person’s 18th birthday to start saving,” says Eacrett.

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“I would recommend homebuyers sit down with a qualified financial advisor to help them make the most out of their savings,” she adds. “Low-risk investments would be a great option to consider.”

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How are funds treated when you eventually take them out? It depends on whether they’re considered qualifying (non-taxable) or non-qualifying withdrawals.

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An FHSA withdrawal is qualifying if you’re a first-time home buyer (as defined by the program) at the time the money leaves your account. For a qualifying withdrawal, you also need a written agreement that states that you:

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• will buy or build a qualifying home before October 1 of the year following the year of withdrawal; and
• intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.

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You can also make a qualifying withdrawal within 30 days of moving into your home.

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A qualifying home is any located in Canada, including a share in a co-operative housing corporation if you have an equity interest (though not if you only have a right to tenancy in the co-op unit).

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As long as you meet all those conditions, you can take out FHSA funds tax-free, whether in one or a series of withdrawals. Contributions to an FHSA made after a qualifying withdrawal aren’t tax-deductible.

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What happens if you want to take out or transfer all or part of the FHSA holdings, without putting them into your first home? That depends. You can transfer FHSA savings on a tax-free basis into a TFSA, an RRSP or a Registered Retirement Income Fund (RRIF).

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Just remember three things. One, these transfers won’t reduce — and aren’t limited by — your available RRSP contribution room. Two, funds transferred to an RRSP or RRIF will be subject to tax upon eventual withdrawal. Three, these transfers won’t give you back room on the FHSA’s lifetime contribution limit.

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If you make a withdrawal without meeting the conditions, i.e., for any other purposes, that’s considered non-qualifying. Those withdrawals are then added to your income, and your financial institution will collect and remit a withholding tax, as with taxable RRSP withdrawals.

Should you Borrow Money to put into an FHSA?

You can borrow money to put into an FHSA, but the interest on cash borrowed isn’t deductible for tax purposes, just as it isn’t if you borrow to invest in an RRSP or TFSA.

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Is borrowing a smart strategy? Maybe for some individuals, especially those who may benefit from a larger tax refund and who have good capacity to repay the loan, says Lang. The rate of return would also have to be higher than the interest rate on the loan. But Perrie isn’t a fan of borrowing for FHSA purposes.

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“I  wouldn’t,” he says. “I’m a big believer in using as less leveraged money as possible. For investors that’s different. But for something that might be someone’s first and only purchase, you want to keep your housing costs as low as possible.”

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Eacrett agrees. “Homeownership comes with many additional expenses over the years. I would advise that you go into it with the least amount of debt possible and plan for the long term,” she says.

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The annual contribution limit applies to the calendar year. Whatever the date in 2023 that the FHSA program starts, account holders will be able to contribute the full $8,000 for the year.

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The tax deduction rules are slightly different than with an RRSP. With retirement savings contributions made within the first 60 days of a calendar year, you’re permitted to assign those to the previous year. With an FHSA, you can’t do so.

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However, as with RRSP deductions, you can either claim a deduction for the year when you made a contribution or carry forward the amount. So that makes sense if you push the deduction to a tax year when you’re earning more.

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Besides contributing to your own FHSA, you can provide funds to a spouse to contribute to their own. However, only the FHSA holder can claim tax deductions.

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If a marriage or a common-law partnership breaks up, amounts can be transferred from the FHSA of one party to an FHSA of the other (or to their RRSP or RRIF). If you’re the one transferring, it won’t reinstate any contribution room; if you’re the one receiving a transfer, it won’t count against your contribution room.

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“This program is geared to encourage Canadians to have a systematic approach to saving money, consistently and over a longer period of time, towards their first home purchase,” says Lang.

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Regardless of your Buying Plans, FHSA can be a Win-Win

Should people set up an FHSA even if they’re unsure if they’ll end up buying a home? “Absolutely,” says Eacrett. “If you need the funds for a home, they’re available to you. If you decide not to buy, you add to your RRSPs. It’s a win-win. The worst case scenario would be choosing neither option and withdrawing the cash as taxable income.”

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She says the homebuyers that the FHSA helps the most are ones who are simply looking to find their way into the housing market, using whatever means they can. That includes entry-level condo buyers, or buyers who are willing to move where prices are more affordable.

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“I love this strategy of climbing the real estate ladder because it gets you into the market and gaining equity until you can move onto a townhouse or semi-detached, for example,” says Eacrett. “From a financial standpoint, this approach makes the most sense, since most people are not able to save at or above the rate of inflation. This strategy takes you off the sidelines and into the game. Instead of watching real estate prices rise, you can start to build equity.”

How far can an FHSA go towards a down payment? It depends, of course, on the purchase price of the home. First-time buyers will need a down payment of 5% to 20%.

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• For homes that cost $500,000 or less, the minimum down payment is 5% of the purchase price.
• For homes at $500,000-$999,000, the minimum is 5% of the first $500,000 and 10% of the portion of the purchase price above that.
• For homes costing $1 million or more, down payments must be at least 20% of the purchase price.

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“It’s important to note that 20% down should be the goal. Less than 20% down on your purchase will mean you must purchase mortgage insurance,” says Eacrett.

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That makes for a large lump sum down payment. Eacrett notes that the Toronto Housing Market Report for September 2022 reported that the average price for a condo apartment in the GTA is $731,000. Using this purchase price, a buyer would need $48,100 down. In this case, the maximum allowable amount of an FHSA could go a long way.

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The same report indicated that the average price for a detached home in the GTA is $1,370,000. Since anything over $1 million requires 20% down, a buyer would be looking at a much more sizeable $274,000 down payment.

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FHSA holdings can make a dent on down payments, but high purchase prices, coupled with rising interest rates, do make buying a first home a stretch for many people. That makes it even more important to use the tools at your disposal to save taxes, add to your nest egg, and get into the market sooner.

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Other Programs and Incentives for First-Time Homebuyers

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While Perrie welcomes the FHSA, “These types of programs, in my opinion, could always go further.” Still, taking advantage of a range of other programs, incentives and strategies can help.

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For instance, the Canada Mortgage and Housing Corporation offers a  First-Time Home Buyer Incentive, in the form of a loan totaling 5% of the resale price for an existing home or 10% of the purchase price of a newly constructed home. The program has been extended until March 31, 2025.

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With this program, purchasers apply the loan toward the down payment, and it becomes a shared-equity investment in the property. In essence, the government offers you financing without interest. This helps to reduce your monthly mortgage payment without increasing your down payment.

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Program users eventually have to repay the loan, but not for some time – within 25 years of purchase or when the property is sold. The repayment will be based on the home’s fair market value at that time.

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The government will limit its share in the rise in value of a home. Homeowners will have to pay back up to a maximum gain of 8% per year (not compounded) on the incentive amount, calculated from the date of advance to the time of repayment. This means that participants may be able to keep more when their homes increase in value.

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The nature of this incentive means that the government also has a shared stake in the downside of the property value, if it happens to decrease. That’s up to a maximum loss equal to 8% per year (not compounded). To be eligible for the First-Time Home Buyer Incentive, your total qualifying income must not exceed $120,000, or $150,000 if you’re buying a home in Victoria, Vancouver or Toronto.

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There are other conditions. The amount you borrow must not exceed four times your qualifying income, or 4.5 times if purchasing in Victoria, Vancouver or Toronto. Plus, you must be able to pay the minimum down payment with traditional funds, e.g., savings, a gift from an immediate family member or other relative, or the withdrawal/collapse of an RRSP.

Using an RRSP to Purchase a Home

Yes, a Registered Retirement Savings Plans can be a tool for homebuyers too. We think of an RRSP as a long-term strategy to help finance post-retirement life, which it is primarily. Yet RRSPs can have other uses.

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Canada’s  Home Buyers’ Plan (HBP) lets Canadians withdraw up to $35,000 from a registered retirement savings plan to build or buy a home. So couples might be able to withdraw up to $70,000 combined, and increase their down payment by that amount, without paying any taxes on the amount.

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The funds being withdrawn must have been in the RRSP account for at least 90 days. They also must be repaid to the RRSP, but there is plenty of time: within 15 years of the date of withdrawal, starting two years to the day. If you withdraw the maximum allowable amount of $35,000, your minimum annual repayment instalments would be $2,333 ($35,000 divided by 15 years). You can always repay more in any given year, reducing your overall annual payments.

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There are advantages and disadvantages to using the HBP. On the one hand, withdrawing money tax-free means the plan essentially works like an interest-free loan. That can make a real difference in the affordability of your first home.

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The ability to draw on up to $70,000 for a down payment can make the HBP “more suitable for homebuyers looking to purchase now or within the next year, since funds can be made available quickly,” Eacrett says.

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On the other hand, putting RRSP money towards a home means you’re just borrowing from yourself. So you’re locking yourself into a set repayment schedule (payments must go back into your RRSP account before the annual RRSP deadline). That becomes yet another fixed and recurring expense, on top of any other loans and your mortgage.

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“I see the FHSA as a better option versus the HBP,” says Eacrett. “The biggest distinction is that one is a loan and the other is a registered, tax-free savings account. It will be crucial for homebuyers who use the HBP to have a clear repayment plan.”

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If you can’t keep to the annual repayment schedule, your RRSP withdrawals will be taxed, which would make it a costly loan.

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“Missed or partial payments will be taxable as RRSP income, so you’d want to ensure you’re avoiding that,” says Eacrett. “Given that the homebuyer is now also paying a mortgage, plus the expenses of running a household, this could put a strain on budgets.”

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Being confident in your ability to set aside the repayment amounts is just one factor in contemplating whether to use the HBP. You also have to think about whether interrupting your RRSP by tapping into funds is a wise decision for your overall financial picture.

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“Consider the loss of future growth within your RRSP on the money that was withdrawn. I sort of see it as a fix for today, a problem for tomorrow,” Eacrett says. “It can be a great tool to help, but the pros and cons should be considered in advance of deciding to withdraw from RRSPs.”

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The HBP and the FHSA can’t be used together, meaning you can’t make withdrawals from both at the same time for the same home acquisition. So homebuyers have to plan ahead regarding

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Making Down Payments more Manageable

The way you approach your down payment obligation can form another part of your strategy to get into the housing market. That’s the biggest chunk to save. As noted, buyers often pay 20% as a down payment. Still, many lenders allow buyers to make down payments of as low as 5% on homes, called high-ratio mortgages. But there is one provision.

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Buyers with high-ratio mortgages must purchase mortgage loan insurance, also known as mortgage default insurance. That insurance can then be blended with monthly mortgage payments. Three institutions offer mortgage loan/default insurance: Canada Mortgage and Housing Corporation, Canada Guaranty and Genworth.

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Going this route means you don’t need to save as much for a down payment, enabling buyers to get into the housing market that much faster.

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There are other ways to reduce your initial outlay. For instance, some municipalities have down payment assistance programs for qualified homebuyers. In Kitchener, the local government will lend 5% of the property value. And Barrie, Simcoe County will lend up to 10% of the property value (with some limits on the price of the home and the income of the borrowers).

In both cases, if you sell before 20 years you must pay back the same percentage of the housing value. But if you end up living in the home for more than 20 years, the loans are forgiven.

Perrie says various municipalities have different forms of assistance for buyers, “so always start at the town level and ask what grants they offer.”

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With everything that first-time homebuyers have to shell out, anything they can recoup makes a difference.

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Some refunds and incentives are available to reduce land transfer taxes (LTTs), which are municipal or provincial fees levied on a property transaction. Instead of making first-time homebuyers pay this fee in full, Ontario offers provincial land transfer tax refunds of up to $4,000 when a home’s purchase price is $368,000 or more. In Toronto, buyers are also eligible for a refund on the municipal LTT – up to $4,475 for first-time homebuyers.

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With the GST/HST new housing rebate, buyers can also recover some of the GST or the federal part of the HST paid for a new or substantially renovated house. Different provinces have their own rebate programs; depending on the jurisdiction and conditions, you may be eligible for both the provincial and federal rebate, only the provincial rebate, or only the federal rebate.

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The federal government also offers a First-Time Home Buyers’ Tax Credit, which they announced this year is increasing to $10,000 (from $5,000), and which provides up to $1,500 in direct home buyer support (up from $750).

Save on Real Estate Commissions

Another way buying a home can become more affordable is to save on commissions. The FHSA can be used in conjunction with the Wahi price program, making a purchase that much more affordable for first-time homebuyers.

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Here’s how Wahi can save purchasers thousands of dollars. The standard real estate commission is 5%. Wahi felt that was too high – way too high, so it created a few ways to lower it. Through MyBuy, buyers have the option of paying for only the services they need to purchase a home, without paying for all the extras.

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The Wahi platform has listings for all of the GTA (updated every 15 minutes), can schedule showings, and uses non-commission licensed experts and Elite Partner Realtors. Wahi also helps buyers find options for mortgages, refinancings, renewals and home equity lines of credit.

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Through the Wahi platform, sellers also have options. For instance a home seller could save 40% of the selling commission with MySell, save 60% by selling through a Wahi auction, or pay full commission through Wahi Full Service to be matched with an Elite Partner Realtor.

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As a digital brokerage, the company is able to cut up to 70% of the buyer’s fee off every sale and pass those savings back. For an average buy, this would come to around 1.5% of the total price paid. And for an average property in the Greater Toronto Area, this would mean about $20,000 back to the purchaser. Homebuyers get their payment two weeks after the closing of their property.

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Calculate your Affordability

For first-time homebuyers, there’s a lot that goes into their calculations. Programs like Wahi’s, the First Home Savings Account and other incentives can all help. But you also have to carefully crunch the numbers to determine what you can afford to spend.

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To determine that, figure out your mortgage affordability. That ties into several factors. Here are four big ones that lenders will look at.

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• Gross household income: Your total income before taxes (or combined income if you’re buying a home with a partner) that you can use to qualify for a mortgage loan. That includes all income streams, e.g. employment or business, child tax credit, pension, disability benefits, etc.

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• Debt-to-income ratio (DTI): This indicates your risk level. The higher your DTI, the riskier you appear. Lenders need to know you can pay them back. DTI is your monthly debt (all bills — from phone to credit cards to loans to car) divided by your gross monthly income. Traditional mortgage lenders like to see DTI ratios under 43%. So for every dollar you make, a maximum of 43 cents would go to pay debt, leaving 57 cents to save, spend or handle unexpected expenses.

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• Credit score: This is a number that indicates your ability to repay a loan on time, based on your bill payment history, unpaid debt, types of loans you have, how long you’ve had them, the available credit you’re using, past history of collections, etc. The higher your credit score, the better. Generally, 660-724 is good, 725-759 is very good, and 760-900 is excellent. On the other side, 560-659 is fair and below 560 is bad. You can check your credit scores through Equifax Canada, RateHub, Borrowell, TransUnion Canada or your financial institution. A low credit score might delay your home-buying plans. To raise your score, pay on time every time, catch up on past-due payments, pay down revolving account balances, limit how often you apply for new accounts, and avoid taking on new debt frequently.

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• Down payment: You’ll need to put down a minimum of 5% of the purchase price or as high as 20% (or even 25% if you’re purchasing a new-build home or pre-construction condo). The size of your down payment will affect how much a lender will loan you, and at what terms. Typically, the higher the down payment, the better the loan terms.

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Weigh other factors when calculating how much house you can afford, like the property taxes and the upfront closing costs (legal and administrative fees, sales tax, home inspection fee, property appraisal fee, mortgage default insurance fee, land transfer tax, moving costs, etc.). Closing costs could amount to 2% of the purchase price. Whether you’re looking at the one-time expenses or ongoing property taxes, they all have to be budgeted.

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To estimate what you can realistically afford to spend on a home, you can find mortgage affordability and payment calculators online (they’re free to use, like  this one). “It’s a great way to get a basic idea of how much you need to save,” says Perrie.

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 As a general savings rule, he also suggests an old-school method: save around 10% to 20% of your income towards your first home.

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Remember, while your home might be your biggest investment, you still need money left over to pay for other essentials, build savings and apply to any other discretionary expenses.

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Financial experts often recommend first-time homebuyers follow the 28%/36% rule. That means spending no more than 28% of your gross monthly income on mortgage payments, and no more than 36% on total debt.

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For example, if you earn $5,000 a month after taxes, your monthly mortgage payment should be no more than $1,400 (28% of $5,000), and your monthly debt should be no more than $1,800 (36% of $5,000).