Inflation numbers are down, but what else is happening? Have you heard of a First Time Home Buyers Savings ACCOUNT?
Interest rates have been rising rapidly over the past 18 months, something we haven't seen since the time when Trudeau was first in office. This has caught many people in the finance industry off guard, as they didn't consider the possibility of rates going up. Now that rates are expected to remain steady or even increase further until the end of the year, there are concerns about the impact on Canadians trying to afford mortgages. If rates stay high for a long time, it could lead to more people and companies struggling to make payments, causing banks to suffer losses and potentially triggering a recession.
Recently, there has been unwelcome news for prospective homebuyers in Toronto and across Canada. Housing prices in Toronto rose by 3.2% in May, the largest increase since early 2022. Affordability is becoming a major issue, prompting the government in Ottawa to take action. One of their initiatives is the First Home Savings Account (FHSA), designed to help aspiring homeowners save for a down payment.
Although it took some time to launch the FHSA, more financial institutions are expected to offer these accounts to clients this summer. So, it's a good time to understand what an FHSA is and whether it's worth using. Here's a quick guide:
What is an FHSA?
An FHSA is an account, similar to an RRSP or a TFSA, that assists first-time homebuyers in saving for a down payment. You can contribute up to $8,000 per year, with a maximum lifetime limit of $40,000. The money can be invested in stocks, mutual funds, bonds, GICs, and other options. The significant benefits are that your contributions are tax-deductible, reducing your taxable income, and any investment returns are tax-free upon withdrawal. This can result in significant savings.
Is an FHSA worth it?
You might wonder if it's worth it to save $40,000 in an FHSA when you'll likely need more for a down payment. Consider this example: If you contribute $8,000 per year for five years (totaling $40,000) directly from your paycheque, and your investments yield an 8% annual return, you would end up with $48,810, including a return of $8,810. Importantly, this money is entirely yours, with no taxes to pay when you withdraw it for a down payment.
On the other hand, if you put $8,000 per year into a savings account, you would have to pay taxes on that money. Assuming a 32% tax rate, the $8,000 becomes $5,440. If you save the same amount annually for five years and earn a 5% yield, you'll have $29,610 (partly because your gains are taxed). That's an almost $20,000 difference between using an FHSA and regular savings. Additionally, the temptation to use your money for other purchases is likely higher with regular savings compared to an FHSA.
Are there any exceptions where an FHSA may not be suitable? If you have high-interest debt or lack an emergency fund, it's advisable to pay off your debt and build up savings before investing in anything. Also, consider your other financial goals, such as retirement. Depending on your income tax bracket, it might be more beneficial to maximize your TFSA contributions before allocating funds to an FHSA. If you're deciding between investing in an RRSP or an FHSA, prioritize the FHSA first. A great advantage of FHSAs is that if you change your mind about using the money for a home, you can transfer it to an RRSP without affecting your RRSP contribution room. So, it's worth considering maximizing your FHSA.
