What is a first home savings account (FHSA) and how does it work?
Buying your first home in Canada can feel like trying to hit a moving target. With rising house prices and the challenge of saving for a down payment, homeownership can seem just out of reach. That’s where a First Home Savings Account (FHSA) and Mainstreet can help.
Launched in 2023, the FHSA is a tax-advantaged savings tool designed to help first-time homebuyers fast-track their savings and take their first step into homeownership with more confidence.
In this blog, we will describe what an FHSA is, how it works, compare it to other investment accounts, and why it might be the right fit for your home-buying journey.
What is an FHSA?
The First Home Savings Account (FHSA) is a registered savings account that combines the best features of a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP), with one mission: to help you buy your first home.
With an FHSA, you can contribute a total of up to $8,000 per year, with a lifetime maximum of $40,000. Like an RRSP, FHSA contributions are tax-deductible, which means they can reduce your taxable income and potentially give you a refund on your tax return. Plus, any unused contribution room can be carried forward to the following year.
But here’s the best part: Like the TFSA, when you withdraw the funds to buy your first home, the money and any growth are completely tax-free. So, you’ll have even more money to put towards the purchase of your first home than what you initially invested! For example, if you invested $8,000 per year for 3 years at a 3.0% interest rate, you would have a total of $25,469 ready to put towards a down payment. That’s $1,469 of tax-free growth you could take advantage of.
How the FHSA Works
To open an FHSA, you must be a resident of Canada, at least 18 years old, and a first-time homebuyer. Meaning that you haven’t owned a principal residence in the past four calendar years.
Like other investment accounts, you can hold a variety of investments in your FHSA, like mutual funds, term deposits, GICs (guaranteed investment certificates), ETFs, and more. Whatever matches your lifestyle, risk tolerance, and goals. Our Mainstreet advisors will work with you to build a personalized investment strategy that fits your financial goals, timeline, and risk tolerance.
When you’re ready to put an offer on a qualifying home, you can withdraw your funds from your FHSA tax-free. To do that, you’ll need to have a written agreement to buy or build a home within one year, and the property must be your principal residence within one year of the purchase date.
If your plans change and you don’t end up buying a home, you can transfer your funds into an RRSP or Registered Retirement Income Fund (RRIF) without affecting your contribution limits, and they are tax-deferred until withdrawn. Keep in mind, your FHSA must close after 15 years of the account opening, either by purchasing a qualifying home or transferring it to an RRSP or RRIF.
Comparing Your First Home Savings Options: Why the FHSA May Be Your Best Choice
When saving for your first home, you may also hear about using an RRSP or TFSA, or even a regular savings account. While all of these accounts can play a role in your savings plan, the FHSA is the only account that was specifically created to help first-time homebuyers, with unique tax advantages that combine the benefits of both RRSPs and TFSAs. While the FHSA offers some of the strongest tax advantages for first-time buyers, accounts like RRSPs, TFSAs, and even regular savings accounts can all play a role in building your savings. The right combination depends on your personal timeline, income, and savings habits. Here’s a quick look at how these other accounts fit into your overall plan:
RRSP – Home Buyers’ Plan (HBP):
You can withdraw up to $60,000 from your RRSP to put toward your first home purchase through the federal Home Buyers’ Plan (HBP). However, any funds you withdraw must be repaid to your RRSP over 15 years, starting in the second year after withdrawal. If you miss a repayment, that year’s required amount will be added to your taxable income. Learn more about RRSPs and the Home Buyers’ Plan here.
TFSA – Flexible, Anytime Savings:
TFSAs allow you to save and invest after-tax dollars, and any investment growth or withdrawals are completely tax-free. You can withdraw funds at any time, for any purpose, without repayment. Many first-time buyers use TFSAs alongside their FHSA to boost their down payment savings. Learn more about TFSAs here.
Regular Savings Accounts:
While simple and accessible, regular savings accounts don’t provide tax benefits. Any interest you earn is taxable, and your savings may not grow as quickly as they would in a registered account.
If you’re unsure which combination of accounts is right for you or need help building a plan that fits your timeline and financial goals, our Mainstreet advisors are here to help every step of the way. We’ll work with you to create a personalized savings strategy, answer any questions about the FHSA, RRSPs, TFSAs, or the home buying process, and help you get started by opening the accounts that fit your goals.
Book an appointment today and take the first step toward your homeownership.