Owning a home is a major milestone, but saving for it can be challenging. With rising prices and financial uncertainty, you need more than a chequing account—you need a smart savings strategy.
That’s exactly where a First Home Savings Account (FHSA) makes all the difference. Read on to explore how you can open an FHSA and use it to become a homeowner sooner.
The Basics of a First Home Savings Account (FHSA)
Rising housing costs and inflation have made saving for a down payment more challenging than ever. For many Canadians, the idea of homeownership feels out of reach.
But what if there were tools to elevate your chances? Meet the First Home Savings Account — Canada's ultimate savings tool to help first-time homebuyers like you take the leap towards homeownership.
What Is an FHSA?
An FHSA is a savings account designed to help you save for a down payment more efficiently. Introduced by the Canadian government, the first home savings account helps address the challenges you may encounter when seeking homeownership.
Your contributions to an FHSA offer a significant tax advantage: your contributions are deducted from your taxable income. This is a factor that helps maximize your savings potential and lowers the tax you pay the year of your contribution. Unlike the contribution room for an RRSP, which is calculated as 18% of your reported income up to a fixed annual maximum, the FHSA has its own distinct rules.
With a first home savings account, you can contribute up to $8,000 as an annual contribution limit, with a lifetime limit of $40,000. There’s also an option to carry forward any unused contribution room to the following year.
Understanding your contribution room is key to maximizing this tax-advantaged account. Exceeding the limit may result in tax penalties.
Who Can Open an FHSA?
To qualify for a first home savings account, you must meet the following requirements:
You must be between 18 and 71 years old.
You must be a Canadian resident.
You must not have lived in a home you, your spouse, or your common-law partner owned during the current calendar year or the previous four calendar years.
You’ll also need to provide your Social Insurance Number and other documents to the bank or credit union where you plan to set up your FHSA. For the most up-to-date eligibility details, visit the Canada Revenue Agency website.
What Are the Benefits of an FHSA?
An FHSA is a unique investment account designed to help you buy your first home. Here are some of the key benefits of owning an FHSA:
Tax-deductible contributions. Just like with a Registered Retirement Savings Plan (RRSP), your FHSA contributions reduce your taxable income. This means you save on taxes while building up your funds for a future home.
Tax-free withdrawals. Similar to a Tax-Free Savings Account (TFSA), you can make any qualifying withdrawal from an FHSA without paying taxes. So, all the interest earned on your investments is yours to keep!
Long-term savings potential. You can contribute to an FHSA for up to 15 years, which gives you enough time to reach your homeownership goals.
Flexibility. This savings account complements other home-buying investment tools. For example, you can combine it with a Home Buyers' Plan (HBP), which allows you to withdraw funds from your RRSP to fund your first home purchase.
When Is It Possible to Buy My First Home with an FHSA?
You have up to 15 years to use the funds for a mortgage down payment.
How quickly you can save for this initial deposit depends on the size of the down payment required. The larger the home’s purchasing price, the higher the initial deposit.
The next step is to account for contribution limits. Remember that the annual contribution limit per individual FHSA caps at $8,000, whereas the lifetime limit is $40,000. If you make consistent contributions to leverage the benefits of compounding growth (earning interest on your interest), you could have the funds for your home deposit in a few years.
Can I Use an FHSA to Buy an Investment Property?
The simple answer is no. A legal requirement for an FHSA withdrawal is the direct (and actualized) intention to occupy the qualifying house as your principal place of residence within 365 days of buying or building it.
The above scenario defines what’s known as a qualifying withdrawal. That is, when you cash out to purchase a home to live in, you won’t be taxed for the transaction.
On the other hand, if it’s not a qualifying withdrawal, the funds you take out must be included as your income and will be taxed.
How Do I Open an FHSA?
Embarking on your home-buying journey and opening an FHSA is exciting—but where do you begin? Here's a brief guide to help you get started.
Check your eligibility. First and foremost, ensure you meet the eligibility criteria to apply for an FHSA. Visit the Canada Revenue Agency (CRA) website for more information on what you need to qualify for the plan.
Contact a financial institution. Banks, credit unions, trusts, and insurance companies offer FHSAs. Compare welcome bonuses, account fees, return rates, and customer service to find the best option for you.
Gather your documents. Be prepared to provide your address, date of birth, Social Insurance Number (SIN), contact details, employment information, and any other documents the financial institution requests.
Review the terms of your agreement. Before signing your written agreement, ensure you understand your contribution limit and any penalties for exceeding the stated limit.
Open your account. Start researching FHSA options to earn tax-free interest on your money. Reach out to us today to get started!
Where Can I Open an FHSA?
You can open an FHSA at most financial institutions. Check out our FHSA account with a high interest rate and zero monthly fees!
Every Canadian deserves to own a home. An FHSA ensures you move one step closer to this goal. Start investing and saving for your future today. Reach out to us to explore how an FHSA can make your dream home a reality.