Background
The national average home price reached a record high of $816,720 in February 2022, up by over 20% compared to last year, based on information provided by the Canadian Real Estate Association. Now, the Canadian government is introducing new policies and measures that assist Canadians who feel locked out of the market amidst record-high home prices and inflation rates.
The First Home Savings Account was introduced as one of the many steps being taken to help out home buyers. This account is projected to provide over $725 million in relief to Canadians over the next five years.
This new program is a revised version of a homebuyer-savings plan that was launched by the government in 1975 but was cancelled in 1985. Research suggests that the program aided in converting renters to homebuyers, but it was driven by higher-income households.
What is a First Home Savings Account (FHSA)?
A FHSA is a tax-free savings account that was created to help Canadians purchase their first home. The purpose of this account is to help first-time homebuyers save for a downpayment. You can contribute up to $8,000 per year for a total of $40,000. Unlike a TFSA or RRSP, you cannot carry unused contributions over.
This account puts together the benefits of a TFSA (Tax-Free Savings Account) and RRSP (Registered Retirement Savings Plan) account. The contributions to this account as well as the capital gain are not taxable. In addition, the contributions made to the account will lower your taxable income by the same amount. The funds withdrawn from a FHSA do not need to be repaid. Once you make your first withdrawal, you have one year to close the account.
The account needs to be closed or the funds need to be transferred to an RRSP if the account is not used to purchase the first home within 15 years of opening it.
Eligibility
To be eligible for this account, you must meet the following requirements:
- You must be a resident of Canada
- You must be 18 years of age or older
- You cannot own a home in the year that the account is opened or the previous four years
Although this is not a requirement, it is expected that the FHSA is used for primary residences and not investment properties since it is an incentive for first-time home buyers . Furthermore, although you can open more than one FHSA, the combined total contributions across all your FHSAs cannot exceed the total and annual limits.
Investing in Your FHSA
This account is not just a savings account, it can be used as an investment account as well so the name may be a bit misleading.
You can invest in the following:
- Stocks
- ETFs
- Bonds
- Cash
- Mutual Funds
- GICs
It should be noted that stocks, ETFs and mutual funds may not be the best move for you if you plan on purchasing a home within the next 5 years.
Home Buyers Plan (HBP) vs. First Home Savings Account (FHSA)
With an HBP, you can only withdraw $35,000, whereas with a FHSA, you can withdraw up to $40,000. Funds withdrawn from an HBP need to be repaid eventually while funds from a FHSA do not need to be repaid .
All things considered, a FHSA is a better option than the HBP for first-time home buyers. It should be noted that you cannot use both accounts to purchase your first home.
Additional Things to Keep in Mind
Although this account was launched as a method to help Canadians purchase their first home, it’s important to note that it does not make purchasing a home cheaper, and you do not earn interest on your contributions. The main benefit of this account is that it is tax-free. Your withdrawals are not taxed and your taxable income is reduced by the amount of your contributions.
Furthermore, you can transfer funds within your FHSA to your RRSP at any time before the year you turn 71. If you are older, you can transfer your FHSA to your Registered Retirement Income Fund (RRIF). The amounts transferred do not count as additional contributions. Also, you should ensure that you have enough contribution room in your accounts before making the transfer.
Alternatives
Now you may be thinking, “what other options do I have?”. You may be searching for an investment account that actually helps you grow your funds. While you can take a look at different products offered by banks, the majority of them will only earn you a measly 1-2%. On top of the low returns, they will most likely charge you investment fees as well.
Take a look at how our Mortgage Income Fund (MIF) compares to an average bank investment that earns you 2% annually:
Our Mortgage Income Fund may be just what you’re looking for when saving for a down payment! While accounts like TFSAs, RRSPs or FHSAs all come with benefits, none of them can earn you a secured annual return like our Income Fund. You can invest in our fund and earn up to 9% annually. Our A.I. tech allows us to cut out the need for investment fees so 100% of your funds are invested directly into helping your community grow. If you invest $50,000, in 5 years you will have earned $26,931 on your initial investment! Now that’s $26,931 closer to buying your dream home!
Use our calculator and check it out for yourself:
https://app.planulife.com/investments/community-fund?view=financial_data#financial_data
Furthermore, when you purchase your first home, you should be well prepared for it. We created our real estate financial plan to help you plan your move. We used our A.I. technology to combine real estate, mortgage and investments into one holistic plan. This plan allows you to decide how much of your funds you want to allocate to investments and realty. It will also show you which steps to take to maximize your profit such as upsizing, downsizing or staying where you are. Head over to our website and give it a shot!
Contact a Planulife Advisor today at 1-855-600-9020 to discuss your options and how you can save for your down payment.
REFERENCES:
Calabretta, Daniel. “New home savings account a “substantial” measure for new buyers.” Advisor’s Edge, 7 April 2022, https://www.advisor.ca/tax/tax-news/new-home-savings-account-a-substantial-measure-for-new-buyers/. Accessed 18 April 2022.
Choi, Barry. “What is the Tax-Free First Home Savings Account? A detailed guide.” Money We Have, 8 April 2022, https://www.moneywehave.com/what-is-the-first-home-savings-account/. Accessed 18 April 2022.
Wong, Craig. “Feds create new tax-free account for first-time homebuyers.” CP24, 7 April 2022, https://www.cp24.com/news/feds-create-new-tax-free-account-for-first-time-homebuyers-1.5853096. Accessed 18 April 2022.
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