Buying a home is a classic life milestone, right? The one that shouts, “I’m officially adulting!” But here’s the rub: with house and condo prices skyrocketing, it’s got a lot of hopeful first-time home buyers wondering if they’ll ever catch a break. According to Statistics Canada, homeownership rates for those aged 30 to 39 have fallen over the last decade, especially in urban centers like Toronto.
The problem is, it’s not just about feeling left out; it’s about saving up that hefty down payment. If you’ve been putting away every penny you can in your bank account to try and jump that hurdle, you need to look at your savings and make sure they’re giving you the best return on your investment. As you are saving your down payment there are a few ways to grow that investment but the First Home Savings account is one of the best strategies to look at.
Why Should You Take Advantage of The FHSA?
The federal government designed the FHSA to make it easier for millennials to squirrel away cash for a down payment and get a piece of that property pie. If you’re not using this tax-free investment product today, it’s time to make that move and put your money to work so that you can buy that dream home faster. It may be confusing for a first-time home buyer, but I’m here to help you understand why it’s important to invest in an FHSA, how it works, and how to get pre-approved for the mortgage you need, at the best rate possible.
Who Is Eligible For The FHSA?
In simple terms, the Tax-Free First Home Savings Account (FHSA) is like a special savings account for Canadians with a valid Social Insurance Number, between 18 (or the age of adulthood in their province/territory) and 71 who don’t own a home and haven’t owned one in the past four years. This includes homes that were co-owned or owned by a spouse or common law partner where you lived as a principal resident.
How Does The FHSA Work?
In a nutshell, the FHSA is a tool to help you save for your first home. You get tax benefits when you contribute, like an RRSP, and your money grows tax-free.
Contributions Matter: You can put up to $8,000 per year into the FHSA, but the most you can save in it over your lifetime is $40,000. You can save for up to 15 years using this account.
Combination of RRSP and TFSA: It’s a mix of two other savings plans, the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) but, it’s only available to first-time home buyers..
You Can Carry Over Contributions: You can carry forward any unused contribution room from previous years, but it’s limited to $8,000 in total with the FHSA. Contributions count in the year you make them, like a TFSA. So, if you want a deduction on your income tax for this year, you need to contribute by December 31.
Accumulating Contribution Room: Unlike a TFSA, which starts accumulating room when you turn 18, and an RRSP, which starts when you earn income, with the FHSA, contribution room starts when you open the account.
You Will Get Tax Deductions: When you contribute to the FHSA, it’s like an RRSP – you get a tax deduction. This means the money you put in reduces your taxable income, which lowers the income taxes you have to pay. You don’t need to claim the deduction right away; you can do it in a future year. You can also transfer money from an RRSP without a deduction, but it won’t restore your RRSP contribution room.
Withdrawals Are Tax-Free: When you want to buy your first home, you can take the money out of the FHSA, and it’s tax-free. Meaning you won’t be taxed on the interest your savings accumulated in the account. However, you must be a first-time home buyer, and the property must be in Canada. An added bonus: You don’t need to pay it back in the following years, unlike the Home Buyers’ Plan (HBP) for RRSPs. Plus, you can use both the FHSA and HBP for the same home purchase.
Investment Options: You can put various types of investments in your FHSA, like mutual funds, ETFs, stocks, bonds, high-interest savings accounts, and GICs. These investments grow tax-free as long as they’re in the account so that all your investment products work together instead of trying to do their own thing.
The Savings Timeline: The FHSA has a shorter time limit – you should use the money within 15 years of opening the account, but most people will likely use it sooner. So, choose your investments based on your timeframe.
When it’s time to buy your house or condo, you can withdraw the funds from your First Home Savings Account without paying any taxes on the interest you made. So, it’s a handy way to build up your down payment and make homeownership a reality much sooner than if you used an old-fashioned savings account alone.
Now Is The Time To Contribute – This Is Why…
Maxing out your contributions in the first five years of opening your FHSA may help you build a larger down payment. For example, if you put $8,000 into an FHSA before the end of the year, and then contribute $8,000 each year, you’ll reach the $40,000 limit in five years. If your FHSA also earns 5% interest on your investments, it could grow to nearly $76,000 in 15 years.
Plus, you will get an income tax deduction for the money you invest. For example, if you were earning $75,000 in 2023, you would get an income tax deduction of $1,640 by opening an FHSA and depositing $8,000 before the end of the year. Using this strategy you can turn around and re-invest the cash you got from your income tax rebate into next year’s contribution. It’s like free money in the sense that you can put towards your home ownership goals.
Even better, right now, if you open a FHSA with me between today and December 31, 2023, you have a chance to win $8,000 towards your 2024 FHSA contribution*. Be sure to ask me how that works when we meet! It’s an awesome opportunity.
Your Next Step: Call Me, Let’s Open Your FHSA Today And Put It To Work For You
Buying a first home will still take work, but the FHSA will make it a little easier for Canadians to get their foot in the door. As an experienced financial advisor and an accredited mortgage broker, I can answer all your mortgage and investment questions, help you set up an account, and figure out which investment products will get you the highest return when it comes to building up that down payment. Set up a meeting with me today – I’m here to help. Then, when you’re ready, I’ll get you pre-approved for that coveted first mortgage too!
I’ll find you the best interest rates and mortgage options. Plus, I’ll give you the benefit of valuable, unbiased advice tailored to your financial situation. Call today at (705) 315-0516 or click here to book a consultation with me and let’s get started.