Friday, April 28, 2023 / by Mario Daniel Sconza
Financial Friday #154: Saving for a Down Payment
Saving up the down payment for your first home in Canada can be a daunting task. At the very minimum, you are going to need 5% and even in a comparatively inexpensive city like Edmonton with an average price of $400K, you are looking at $20,000. There are lots of tips and tricks on how to save for your first house, but this article isn’t about personal budgeting, it’s about where to park your savings along the way to purchasing your new home.
The good news is that in addition to home buyer incentives, you also have a few savings account options to consider. You could put your money under your mattress, in a savings account at your local bank, or take advantage of one of the government’s “registered” savings accounts. These include the Registered Retirement Savings Plan (RRSP), the Tax-Free Savings Account (TFSA), and the new kid on the block, the First Home Savings Account (FHSA).
The main advantage of these three registered accounts is the option to invest and grow your savings while cashing in on some serious tax advantages, allowing you to reach your home ownership goal even faster. It is also possible to use a combination of these accounts, but that may require a lot more income than you have at your disposal.
My retirement plan has a home buying option?
RRSPs are quite well known for punishing early withdrawals — ideally you would keep your money in your RRSP account until you retire, and then draw out the cash you need at a nice, low tax rate during your retirement years.
However, the Home Buyers’ Plan (HBP) is an exception to the rule. Under this plan, you can withdraw up to $35,000 from your RRSP to buy a home. Although you won’t be taxed on that withdrawal, the catch is that you have to begin paying that money back to your RRSP starting a couple of years down the road. If you don’t pay it back on schedule over the next 15 years, the tax man will come calling as that withdrawal becomes fully taxable! It’s a good benefit, but you need to follow the rules and make sure the repayment schedule fits your budget.
Can I use a TFSA to buy a home?
The advantage of a TFSA is that you could invest your down payment savings and would never be taxed on your investment returns. As the name says, after growing your portfolio for a few years, you could take those tax-free savings and head right down to the bank and put it down on a new home.
The only real consideration is that you will have to wait until next year if you want to put that money back into your TFSA . A TFSA can also be used by anyone who fails to meet the criteria for a first-time homebuyer as required by the HBP and the FHSA.
Although this all sounds straightforward, the issue gets complicated when you start to think about using both an RRSP and TFSA. The most you could take out of your RRSP to buy a home is $35K, so once you hit that mark should you start putting your money into a TFSA?
FHSA: The new kid on the block!
As of April 1, 2023, there is a new contender for your down payment savings dollars — the FHSA. This is yet another tax-advantaged account from the federal government that takes a stab at combining the best of both the TFSA and RRSP. Although it is not 100% confirmed and the rules could still be tweaked, it basically allows you to do this:
Make a tax-deductible contribution of up to $8000 annually (maximum $40,000 lifetime).
Invest your contributions in stocks, funds, fixed-income securities, etc.
Withdraw the money anytime within 15 years of opening your FHSA to buy a qualifying home — with no need to pay back the funds.
Carry forward unused contribution room, and also carry forward tax deductions and apply them in future years (if suspect your income is on the way up).
Transfer funds to an RRSP or TFSA, or withdraw the funds anytime and pay the tax if you don’t buy a home with in 15 years.
If you have been piling up your money in an RRSP or TFSA and think the FHSA suits you better, it looks like you will also be able to transfer RRSP and TFSA funds into an FHSA. Moreover, at this time it is also possible to take advantage of both the FHSA and the HBP allowing a couple to withdraw up to $150,000 of combined RRSP/FHSA funds for a down payment. There are still a few other details to be worked out, but at this point, the FHSA looks like a great down payment option for first-time home buyers.
Homebuying in Canada has become increasingly difficult in many regions. Sound financial planning and a good credit score will help you save money and obtain financing, but don’t neglect the tax advantages and investing options of the RRSP, TFSA and FHSA.
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