Financial Friday 176: Where do I put the Money I am saving up for a Home?

Saving up to buy your first home in Canada is a huge challenge regardless of where you live. Even in a comparatively inexpensive city like Edmonton with a current average price of $400K, you are looking at $20,000 for the minimum 5% down payment. There are lots of tips and tricks on how to save that money, but this article isn’t about budgeting, it’s about where to park your savings along the way to purchasing your new home.

You could put your money under your mattress, in a savings account at your local bank, or take advantage of the government’s “registered” savings accounts. These include the Registered Retirement Savings Plan (RRSP), the Tax-Free Savings Account (TFSA), and the First Home Savings Account (FHSA). The main advantage of registered accounts is the option to invest and grow your savings while also cashing in on some serious tax advantages, allowing you to reach your home ownership goal even faster.

My retirement plan has a home-buying option?
RRSPs are well known for punishing early withdrawals. They work best if you keep your money in your RRSP until you retire and your tax rate drops. However, the Home Buyers’ Plan (HBP) is an exception to the rule and allows you to 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 can 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.

The new kid on the block
As of 2023, there is a new contender for your down payment savings dollars — the FHSA. This latest tax-advantaged account from the federal government combines the best of both the TFSA and RRSP. The FHSA allows you to make a tax-deductible contribution of up to $8000 annually (maximum $40,000 lifetime). You can withdraw the money anytime within 15 years of opening your FHSA to buy a qualifying home — with no need to pay back the funds.

Just like a TFSA, you can, you can invest and grow your FHSA contributions tax-free. Unused contribution room can be carried forward and if you don’t ever buy a house, you can transfer the money to an RRSP without affecting your RRSP contribution limit. If you have been piling up your money in an RRSP or TFSA and think the FHSA suits you better, there are provisions to transfer existing RRSP and TFSA funds into an FHSA. Moreover, it is also possible to take advantage of both the FHSA and the HBP. This would allow a couple to accumulate up to $150,000 of combined RRSP/FHSA funds for a down payment.

Homebuying in Canada has become increasingly difficult with high home prices and high interest rates. 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.

Although a down payment is the number one hurdle for potential homebuyers, there are plenty of other considerations and must-know facts — from financing and mortgages, to first-time buying incentives, to closing costs.

If you are thinking about a home (even years down the road) it pays to know what to expect and how the process works. Why not join Enriched Academy Co-founder and real estate investing expert Jay Seabrook next week for a free webinar on the homebuying process? Jay will run through everything a first-time homebuyer should know and answer any questions you have. 


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