Should I use a First Home Savings Account or RRSP Home Buyers’ Plan to save for a down payment?

Getting into homeownership is one of the biggest life events anyone can have. Starting early on saving for a down payment can help ensure you’re well prepared when you start actively searching for that dream home. 

When it comes to homeownership, one of the biggest first steps is the down payment. No wonder people take years saving for it and it’s a huge achievement for anyone. The good news is that the Government of Canada offers two special options to help Canadians save for a future home purchase. 

These are the First Home Savings Account (FHSA) and RRSP’s Home Buyers’ Plan (HBP). In this article, we’ll cover each of these powerful tools and their differences to help guide what’s right for you.

The TFSA is a great investment tool that allows Canadians to have earnings and withdrawals on their investments tax-free. On the other hand, an RRSP is a savings account designed to help Canadians save for retirement. With an RRSP, contributions are generally tax deductible but withdrawals before or after you retire may be subject to tax. 

The great advantages of an FHSA is that it acts similar to both a TFSA and RRSP, where your contributions to the account are tax deductible and any qualifying withdrawals from the account are tax free. With an FHSA, you can contribute an annual amount of up to $8,000, which are generally deductible on your personal income tax return filing, with a lifetime contribution maximum of $40,000 per person. 

Just like any registered accounts, you can invest and hold multiple investments inside an FHSA which can potentially help in growing your money for a future home purchase.

Here are other key information about the FHSA:

• Since it’s an account to help first time home buyers, you must be a first-time homebuyer at the time you make the withdrawal. This means that you, or your spouse, cannot have lived in a home you owned, in any part of the calendar year before the withdrawal or in the past four calendar years. 
• You can transfer funds from an FHSA to another FHSA account, RRSP or a RRIF tax deferred basis. When you transfer from an FHSA to an RRSP or RRIF, the transfer will not reduce, or be limited by, your available RRSP contribution. It will also not restore any of your FHSA annual contribution limit.
• Contributions during the first 60 days of the year: Unlike RRSPs, contributions that you make to your FHSAs during the first 60 days of the year are not deductible on your previous year’s income tax and benefit return. You also cannot claim a tax deduction for any FHSA contributions that you make after your first qualifying withdrawal.

To learn more about the most frequently asked questions about FHSA including eligibility if your partner owns the house or what counts as a ‘home’ under FHSA rules, please check this helpful FAQ article.

You can use your RRSP for a down payment option for your first home with the Home Buyer’s Plan. With the RRSP Home Buyer’s Plan (HBP), you and your spouse or common-in-law partner can withdraw a maximum of $60,000 per person (or $120,000 combined) tax-free for a qualifying home. Once you withdraw the funds, you have up to 15 years to pay it back. Repayments begin in the fifth year after the year in which you withdraw the funds (if the funds are withdrawn between January 1, 2022, and December 31, 2025).

Similar to an FHSA, you have to be a first-time home buyer to qualify for this program.

Below are more notable information about HBP:

• Qualifying account holders can withdraw funds from more than one RRSP account. For example, if you and your spouse each have an individual RRSP and choose to participate in the plan, you can withdraw a combined maximum of $60,000 per person for a total of $120,000. If you have an individual RRSP and also a Spousal RRSP, you can withdraw a combined maximum of $60,000 CAD (or CAD-equivalent) under the HBP.
• Required to pay back a minimum of 1/15th of the withdrawal amount every year.
• All withdrawals from an RRSP for the HBP must be made within the same calendar year.
• RRSP contributions must be held in an RRSP at least 90 days before they qualify to be withdrawn to participate in the Home Buyers’ Program.
  

While both are designed to help first time home buyers get their first home, there are some key differences between them.

The biggest difference between the FHSA and HBP are their contribution limit, withdrawals, and repayment. 

Contribution: The FHSA gives you an annual contribution of $8,000 per year. In HBP, you have an RRSP where you can contribute up to 18% of your earned income from the previous year or the RRSP limit.

Withdrawals: As for withdrawals, both FHSA and HBP allow you to do a qualifying withdrawal tax-free for a qualifying home. The HBP allows you to withdraw up to $60,000 per person while the FHSA does not have any limits on a withdrawal. For example, you can withdraw the maximum contribution amount of $40,000 per person plus any earned income from your investment.  

Repayment: For repayment, you don’t need to repay amounts withdrawn from an FHSA. For the Home Buyers’ Plan, the repayment grace period begins in the fifth year after the year in which you withdraw the funds. Please note: The extended grace period currently applies to HBP withdrawals made between January 1, 2022, and December 31, 2025.

Yes, you can use both an FHSA and HBP withdrawal for the same qualifying home purchase. For more information, please visit this from the helpful article Government of Canada website.

At the end of the day, whether using an FHSA or an HBP will boil down to your situation. Both allow you to save for a down payment and withdraw tax-free.

One thing to note, there are no limits to an FHSA withdrawals , as long as you use the funds for a qualifying home. This means that if you understand your time horizon and open an account early, as well as grow your money through compounding interest, you can save for a down payment. Let’s look at a hypothetical scenario below.

Please note: Certain conditions apply for FHSA withdrawals for a qualifying home. To learn more and how you can withdraw from your FHSA account, please take a look at this helpful article.

Let’s say you’re 23 years old and a newly graduate. You know eventually you want to get a home in the future so you opened an FHSA account and contributed $100 per month (amounting to $1200 contribution a year) to start saving. You put it into an investment that gives an average return of 8% per year.  

By year 3, you started earning more and decided to contribute $300 monthly ($3,600/year). By year 5 at the age of 27, you continually increased your earnings and got more serious on saving.  So, you started contributing the maximum yearly contribution for the FHSA of $8,000 for two years.

At age 29, you received a good chunk of bonus at work and put more into your annual contribution to $10,000. The next year, your contribution room to the FHSA account is almost maxing out with $4,400 left. You contributed the rest of it and maxed your contribution room at the age of 30.

In the next few years, you let your money grow and at age of 34, you decided to purchase a property and withdraw your savings from the FHSA account tax free. 

By the time of withdrawal, your money grew to $71,640. This was a $31,640 investment growth from your $40,000 FHSA contribution over 12 years and helped you purchase a home. 

In addition, if you’ve been also contributing to an RRSP and holding some investments, you can withdraw a maximum amount of $60,000 (tax-free) for a qualifying home purchase through the Home Buyers’ Plan. 

Since you understand the power of compounding, you decided to wait 3 more years to grow your money. In the table below, you can see your balance compounding more and give you an FHSA balance of $90,246. This was a $50,246 investment growth that you can withdraw tax-free for a down payment– a 125% growth by saving it under an FHSA. 

Please note: The FHSA has a lifespan of 15 years. After that time, the funds must be transferred to an RRSP or RRIF.

As you can see, contributing to your FHSA and letting it grow for years can provide a helpful sum of money to help you pay for a future down payment. 

What’s more, the scenario above is for one person only. The great news is that if you and your spouse or common law partner have been contributing and saving with an FHSA, your withdrawal amount for a down payment can potentially be doubled.

You may not see a big return of investment initially in the early years. However, if you’re consistent and be patient, you can see that you can potentially grow a large down payment using compound interest with an FHSA.

As an old adage says, “The best time to start was yesterday. The next best time is now”. Saving a down payment can be a long journey for many. However, if you start early on saving and growing your money, you’ll be well on your way to saving for a down payment for a future dream home. It is possible and you have the power to take hold of your future. 

Remember, using tools like the FHSA and HBP can provide valuable assistance in saving for a down payment. Here, we can see that the benefits of an FHSA can be a powerful tool to start saving for a down payment for your future home purchase. The FHSA gives you the tax deductible advantage for contributions and withdrawals for a down payment are tax-free without you having to repay them. 

By taking proactive steps today, you can start paving the way for a brighter future– a future where you hold the keys to your own home with your family. 

Note: The information in this blog is for information purposes only and should not be used or construed as financial, investment, or tax advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.