If you’re saving to buy a new mini home, there’s a government initiative designed to make it easier to save — the First Home Savings Account (FHSA). This savings tool can help you reach your goal of home ownership faster, and it’s easy to get started with one. Here’s the lowdown:
What is the FHSA?
Launched in 2023, the FHSA is a registered savings account specifically created for first-time home buyers. It allows you to save up to $8,000 per year, with a maximum lifetime total of $40,000 tax-free, making it easier to accumulate the funds needed for a down payment on your first home. Interestingly, and despite the name of this program, you don’t have to be saving for your first-ever home purchase, you just can’t have bought a home within the past four years, or this is your first home purchase after the dissolution of a relationship.
How Does the FHSA Work?
The FHSA combines the best features of an RRSP (Registered Retirement Savings Plan) and a TFSA (Tax-Free Savings Account). Just like an RRSP, contributions to your FHSA are tax-deductible. This means that the money you contribute can lower your taxable income, potentially resulting in a tax refund. This can be especially beneficial in your early earning years when you might be in a lower tax bracket, but in truth it’s a benefit that many Canadians have relied on with RRSPs for years no matter how far along they are in their careers.
Just like a TFSA, any investment income generated within the FHSA—be it interest, dividends, or capital gains—is going to grow tax-free. This means your savings can grow faster while you pay zero tax on them, and more of your hard-earned money is going to go directly to your savings, taking you closer to that down payment with every dollar you put in.
When you’re ready to buy your first home, you can withdraw funds from your FHSA tax-free, provided the money is used for a qualifying home purchase (again, the first home that you’ve bought in four years).
Key Features of the FHSA
You can contribute up to $8,000 per year, with a lifetime contribution limit of $40,000. If you don’t use your full contribution limit in a given year, you can carry it forward to future years. This helps this to be a super flexible program and allows you to catch up if you aren’t able to contribute as much as you’d hoped in one year.
When you open an FHSA, similarly to an RRSP, you can invest in a variety of options, including stocks, bonds, and mutual funds, allowing your money to grow more aggressively if you are comfortable with higher risk/ higher reward funds.
Getting Started
Talk to your bank about opening an FHSA, or do as little research to see whether other financial institutions offer FHSAs that appeal more (look for options with low fees and good investment choices).
Determine how much you want to save each year and stick to that plan. Consider automating your contributions to ensure you’re consistently putting money aside. You can always increase or decrease the amount should your circumstances change, and deposit lump sums to help speed things up should you have a little extra money to add.
The First Home Savings Account is a fantastic resource for first-time home buyers in Canada. By taking advantage of its tax benefits and growth potential, you can make your dream of homeownership a reality sooner than you think. So, start saving today, and take that first step toward your beautiful new Kent mini home!
