Why the new FHSA is great, even for those who don’t end up buying a home

Personal finance contributor Christopher Liew explains how the First Home Savings Account works, including its tax advantages, contribution limits, and eligibility criteria. (Getty Images / Phakphum Patjangkata)

For many, the dream of home ownership may seem far out of reach. Home prices and property values are high and the cost of utilities, groceries, and other daily necessities continue to rise.

The First Home Savings Account (FHSA) is a new tool to help first-time prospective home buyers save for a down payment on their first home.

Below, I’ll explain more about how the FHSA works, including its tax advantages, contribution limits, and eligibility criteria.

What is the FHSA and how does it work?

A 2022 report by Statistics Canada showed that home ownership rates throughout the country dropped by 2.2 per cent between 2011 and 2021. The government launched the First Home Savings Account (FHSA) program in 2023 to make homeownership more achievable for Canadians.

The FHSA is a tax-advantaged account designed to help first-time homebuyers save for a down payment. It combines some of the best features of both a TFSA and an RRSP:

• Contributions are tax-deductible (just like an RRSP)
• It can be used as an investment vehicle
• Withdrawals are tax-free when used for a qualifying home purchase (like a TFSA)

FHSAs can hold a variety of investments, such as stocks, ETFs, and GICs. This can help your savings grow and compound, and can also offset the negative effect of inflation.

Who’s eligible?

To open an FHSA, you must be a legal Canadian resident who’s at least 18 years old and must be younger than 71 by Dec. 31 of the year you open your FHSA.

You must also qualify as a first-time homebuyer, meaning:

• You don’t currently live in a home that you’ve purchased (either individually or jointly with a co-buyer)
• You haven’t lived in a home you’ve purchased in the past 4 years

This means, for example, that if you previously owned a home more than four years ago and were forced to sell it due to a divorce, financial issues, etc., you may still be eligible to open an FHSA.

Similar to a TFSA or RRSP, you can open an FHSA at most major banks and credit unions. If you’re not sure about your eligibility or have a unique circumstance, it’s a good idea to schedule an appointment and speak with a banker to review your eligibility.

You can see a complete breakdown of the rules and definition of a “qualifying home” on the government’s official FHSA info page.

FHSA contribution limits

Currently, the FHSA has an annual contribution limit of $8,000 annually, with a lifetime maximum limit of $40,000. If you don’t contribute the full $8,000, the additional contribution room can be rolled forward into the next year.

It’s important to note that you can’t roll more than $8,000 into the following year. This would mostly be an issue if, for example, you didn’t contribute for multiple years and then wanted to make a more sizable deposit later down the line.

All in all, your FHSA account can stay open for up to 15 years, which gives you plenty of time to save up.

How to get the most out of your FHSA

The FHSA is a powerful tool not just for saving, but for growing your money. One of its biggest perks is that you can use it to invest in options like stocks, ETFs, mutual funds, or even safer choices like GICs.

Think about what suits your goals. For example, if you’re looking for growth over time, ETFs can be a great option. Many have a history of solid returns or even pay dividends, which can help your investments grow faster.

On the other hand, if you prefer a safer approach and know you will buy in the next one to five years, GICs guarantee a return. While the gains might not be as high, there’s peace of mind in knowing exactly what you’ll earn.

Final thoughts

The FHSA is an excellent new account that every new prospective homeowner should take advantage of. It’s my favourite new account for Canadians, and even if you don’t use it to buy a home, you can roll it over into an RRSP and use it to save for your retirement instead.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.