A first home purchase in Canada usually takes several years of careful saving. The savings account where the money will be kept is crucial, but equally important are the assets in which they will be invested. A First Home Savings Account has a number of useful tax advantages, but keeping all the contributions in a low-interest account might not yield much. Conversely, taking a near-term down payment and risking it with a market crash before it becomes necessary could be dangerous.
The FHSA was introduced on April 1, 2023. Within the first year of operation, 484,320 taxpayers in Canada made contributions to the FHSA totaling around $2.89 billion. The median contribution was the maximum annual contribution of $8,000, while 57.2% of contributors were aged 25 to 34.
Making decisions about which investments are best for an FHSA will depend primarily upon the time when the house can potentially be bought, how risky the person buying the property is willing to be, and if the down payment needs to stay consistent. Some of the investments that could be used include cash, high interest saving plans, Guaranteed Investment Certificates, bonds, exchange-traded funds, mutual funds, and stocks. What is the best investment is often not the investment that has the most potential to return.
What Is FHSA And When Did FHSA Start?
First Home Savings Account (FHSA) is a registered account that is meant to assist those who qualify as first-time home buyers to save towards a qualifying home. Eligible contributions are typically deductible from taxable income, eligible investment gains can accrue in the account, and eligible withdrawals will be tax-free.
The account was launched by the federal government in 2023, and financial institutions were allowed to offer the FHSA beginning from April 1 of the same year. FHSA consists of key features of RRSP and TFSA. Just like in RRSP, eligible contributions may be deductible from the income tax. Similar to a TFSA, a qualifying withdrawal doesn’t have to be reported as taxable income.
The fact that a combination of such features leads to the creation of the tax-free First Home Savings Account is what makes it one of the most valuable investment accounts in Canada for those who qualify. It should be noted, however, that the FHSA doesn’t generate any returns in particular.
How Does FHSA Work?
The FHSA participation room starts only once the first account has been opened. The participation room for the first year of opening an FHSA is $8,000. The lifetime limit on contributions is set at $40,000. Any unused participation room can be transferred forward. The maximum carry-forward amount for any particular year is limited to $8,000.
This means that when a person opens an FHSA and makes a contribution of $3,000 for the year, he or she can transfer the unused participation room of $5,000 into the next year. Provided the person still meets the lifetime limit and other criteria for the FHSA, the maximum amount of participation room would be $13,000 in the next year.
The contribution is always deductible from taxable income unless the taxpayer elects otherwise. However, any transfer from an RRSP into an FHSA does not make a new deduction because the original RRSP contribution may have been already deducted.
When the qualifying withdrawal conditions are satisfied, all eligible property in the FHSA may be withdrawn tax-free, either through one withdrawal or several withdrawals. Unlike money taken under the Home Buyers’ Plan, qualifying FHSA withdrawals do not have to be repaid.
FHSA Eligibility For Canadian First-Time Home Buyers
To open an FHSA, a person would have to be a resident of Canada, above 18 years of age, and a first-time home buyer under the FHSA rules. In some provinces and territories, the age limit to open the account could be 19 years old.
Under the first-time home buyer test for the purpose of opening an FHSA, a person would have to determine if they lived in the qualifying home as the principal residence that they or their spouse or common-law partner owned in part of the current calendar year before opening the account, or in the previous four calendar years.
The first-time buyer test to qualify for a withdrawal is not necessarily the same as the one to open an account. Therefore, eligibility needs to be tested once more prior to withdrawal of funds for purchasing the property.
A person does not have to wait till they are ready to purchase before opening an account. The reason being that the FHSA participation room will only start accruing from the time of opening the first FHSA.
FHSA Benefits For First-Time Buyers
The primary FHSA benefit is that this type of plan combines a potential tax deduction for the contribution and tax-free qualifying withdrawals. It can make each dollar contributed in this way more valuable than the same sum saved in the traditional manner.
An eligible purchaser who makes the $8,000 contribution and takes the deduction will save a certain sum depending on his/her marginal tax rate and particular situation. This refund could be deposited into the FHSA, put into another savings account, used to pay off debts, or kept for closing costs.
Gains and income could stay tax-protected while invested in the plan. Under the condition that all of the conditions are fulfilled regarding the eligibility for qualifying withdrawal, both the contributions and the gains could be withdrawn tax-free.
Finally, unused FHSA assets do not necessarily need to be withdrawn as taxable income even in the case when a house is not bought. Depending on some conditions, it could be moved directly to an RRSP or RRIF in a tax-deferred manner. The direct transfer of the funds is not likely to use up the current RRSP contribution room.
What Makes An FHSA Investment Suitable?
The best FHSA investments depend less on the individual’s age and more on when they expect to buy their home.
While the 27-year-old individual may require a very conservative portfolio because of his plans to buy a house within 18 months, the 40-year-old may take more risks due to the longer time before he will need the funds.
This is because the matter at stake is not the time an individual has to go until his retirement period. Rather, it is the time the down payment is due.
There are three questions that can assist an investor in making an investment decision.
These include what time the individual is planning to purchase his property? What is the maximum amount the individual can afford to lose without affecting his plans to purchase? What is the flexibility of the planned purchase date?
Best FHSA Investments For A Home Purchase Within Two Years
When the expected purchase is less than two years away, preserving the down payment is usually more important than pursuing high growth.
Cash, high interest savings accounts, money market funds, short-term deposits, and redeemable GICs could work well since they usually have more stability and liquidity. The return may not be much, but the balance will probably not drop suddenly just prior to making the offer.
A high interest savings account held through an FHSA could be helpful for buyers who need quick access to money. Its interest rate needs to be weighed against account charges, promotional terms, deposit insurance, and withdrawal processes.
Short-term GICs could give a guaranteed return if the buyer has some idea about the expected purchase date. A redeemable GIC would allow greater flexibility; however, it could yield less than a non-redeemable one. A non-redeemable GIC would expire before the estimated time of withdrawal since it is usually hard to get at that time.
It is usually hard to argue why stocks and equity-loaded funds are good for buying a house within one to two years since even a well-diversified market might go down in a relatively short period of time.
Best FHSA Investments For A Three-To-Five-Year Timeline
A buyer with three to five years before purchasing may consider a mixture of stability and moderate growth.
The conservative segment could be invested in GICs, cash, short-term bonds, or high-interest savings accounts. A small portion of it could be allocated in a diversified balanced ETF or mutual fund if the purchaser can handle market swings and is prepared to rebalance closer to the time of purchase.
The GIC ladder will come handy at that stage. Rather than locking in the total amount into a single term investment, the amount can be split between GICs with differing maturity periods. It will allow having regular access to some part of the saved amount while avoiding commitment of the total amount at one rate of interest.
Short-term bond funds could also be considered, but they shouldn’t be regarded as assured investments. The bond prices may drop on changes in interest rates or creditworthiness. An ETF with bonds will be more stable than an equity fund, but it can still go down in price.
Someone using a balanced investment should gradually reduce risk as the buying date becomes clearer. Waiting until the final few months to move a large equity position into cash can leave the account exposed to an inconvenient market decline.
Best FHSA Investments For More Than Five Years
With more than five years before a likely purchase, diversified growth investments may have a larger role.
Exchange-traded funds may give exposure to Canadian, US, international, or global markets. Asset-allocation ETFs include equities and bonds and rebalance automatically to maintain the right mix of investments.
Mutual funds may be used for diversification, with professionals managing the investments, although there are huge differences in fees. Consider the management expense ratio, asset allocation, objective, and risk rating when selecting the fund.
Stocks are also a possibility, but they have higher company-specific risk. It is not the best way to put money into speculation on a particular stock, industry, emerging technology, or investment theme. The risk is that the money lost may lower the down payment or delay the purchase.
A longer time period does not mean market risk goes away. One should plan how and when the portfolio becomes less risky. One possibility is to gradually lower the exposure to stocks when the planned purchase is three years away.
High-Interest Savings Accounts Inside An FHSA
A high-interest savings account is likely to be one of the most suitable choices for an FHSA investment for people who have a short or uncertain term.
It provides easy accessibility, convenient pricing and low volatility. The income received through interest will remain protected within the account and become a component of a tax-exempt withdrawal. However, the notion “high-interest” should be taken critically. The interest rate may fluctuate and promotional terms will come to an end. Buyers must find out whether interest accrues daily, whether the offered interest rate is temporary, whether account fees are charged, and whether money can be withdrawn promptly to purchase a property.
Money will be needed as well for a transfer of investments sold prior to closing. The placement of funds into a stable asset some months before purchase will eliminate the possibility of a sudden market fall.
Guaranteed Investment Certificates For FHSA Savings
GICs can be among the best FHSA investments for conservative investors since the terms of principal and interest are known in advance, depending on the terms of the issuer.
The main benefit of using GICs comes from their applicability to situations where there is an established schedule. GICs with a term of one year might work well in case of a purchase in 12-18 months; however, a series of shorter GICs may prove to be more flexible.
The disadvantage of GICs lies in their lack of liquidity. Non-redeemable GICs do not provide the possibility of withdrawing the funds before maturity. Thus, in case a purchaser suddenly found a good deal, he or she would not be able to withdraw the money.
When buying GICs, make sure you compare the terms such as terms of investment, conditions of early redemption, way of calculating interest, terms upon maturity, issuer, and eligibility of the product for deposit insurance.
Exchange-Traded Funds For Long-Term FHSA Growth
ETFs may be suitable for an FHSA when the purchase is several years away and the account holder can accept temporary losses.
A broad-market ETF may comprise many, even thousands, of stocks. This may help to reduce risks linked with dependency on a single corporation, though an ETF itself may go down when the market declines.
There is the possibility of choosing asset-allocation ETFs that will suit investors who would like to diversify without buying many investment vehicles. Conservative, balanced, growth, and all-equity ETFs may exist. The type of asset allocation ETF should suit the time when a house will be bought, and not when the highest returns are needed.
The cost is a very important issue. Management expense ratio, trading commissions, bid/ask spread, foreign currency transactions expenses, and platform charges must be considered. Low management expense ratio cannot compensate for the fact that the buyer buys and sells often or picks up wrong risk levels.
It is necessary to review the ETF portfolio when the moment of buying a house approaches. The investments allocated for the down payment should become more conservative instead of being exposed to equities completely.
Mutual Funds In A First Home Savings Account
Mutual funds can work well for purchasers that prefer a professional management of their investment portfolios or automatic periodic investing into the funds.
Mutual funds invest in stocks, bonds, money market securities, or even a combination of all these investments. There are conservative mutual funds and some mutual funds for growth.
The problem with mutual funds is their expense. Management fees vary greatly and the higher the fee, the less money is left to invest. One must compare the management expense ratio of the fund to other mutual funds that are less expensive and analyze the services provided for the fee paid.
The important thing about the professionally managed mutual fund is that it cannot ensure positive results. The assets of the fund may depreciate in value.
Bonds And Bond Funds Inside An FHSA
Bonds may be more secure compared to stocks, yet bonds do carry some risks.
The risk involved with investing in a government bond is usually lower than that associated with a corporate bond. Corporate bonds can deliver higher returns but at the same time involve more risks than government bonds. The price of bonds tends to fall when interest rates increase. In addition, the longer the maturity of the bond, the more the risk increases.
A bond mutual fund does not have a single maturity period like bonds. The value of a bond mutual fund changes on a daily basis. Those investors who are interested in getting a fixed amount at a certain time would opt for GICs or deposits rather than having a bond fund.
Are Individual Stocks Suitable FHSA Investments?
Individual stocks have the potential to generate significant growth, although there is also the possibility that they will fall in value quite rapidly.
An investor may feel good about investing in his employer’s stock, or a prominent Canadian company, or a popular technology stock. Nevertheless, when using a single company to finance a house down payment, there is a problem of concentration risk.
Despite being a profitable firm, a company can suffer from regulation problems, earnings shortfall, weak performance in the particular industry, management troubles, or even a general market downturn.
In most cases, for the buyers, it is better to invest in diversified funds rather than individual stocks. If one prefers stocks, then he should consider concentration issues, know the business, and get ready to postpone buying a house.
A Simple FHSA Investment Approach By Timeline
A timeline-based structure can help connect the investment choice to the actual goal.
| Expected Home Purchase | Possible FHSA Approach | Main Priority |
| Less Than Two Years | Cash, high-interest savings, short-term or redeemable GICs | Capital stability and access |
| Three To Five Years | GIC ladder, cash, short-term bonds, cautious balanced investments | Moderate growth with declining risk |
| More Than Five Years | Diversified ETFs or mutual funds with a planned shift toward safer assets | Long-term growth and later capital protection |
This is not a universal portfolio recommendation. Income stability, other savings, home prices, risk tolerance, and flexibility can change what is appropriate.
How To Open First Home Savings Account
The first step is to confirm FHSA eligibility. The applicant should be a qualifying individual at the time the account is opened and should review the CRA’s first-time home buyer definition rather than relying only on a financial institution’s marketing description.
Finally, look at the FHSA provider. Various financial institutions like banks, credit unions, trust companies, investment dealers, robo-advisors, and any other eligible issuers may offer various types of accounts. Some may offer only deposit and GIC options, while some may offer self-directing investing options in ETFs, mutual funds, stocks, and bonds.
The purchaser needs to check account fees, trading fees, investment options, advice services, transfer fees, minimum balances, automated deposit fees, currency exchange fees, and withdrawal fees.
Once the first FHSA has been opened, Schedule 15 must normally be filled out along with the income tax and benefit return of the same year, even though no contribution or RRSP transfer was made.
Also, it must be noted that merely intending to open the FHSA does not create a participation room. The room starts once the account has been opened.
What FHSA Quotes Should Include
The phrase FHSA quotes is sometimes used by consumers searching for account rates or provider comparisons. An FHSA is not an insurance policy, so a quote should not imply a guaranteed investment result.
An effective FHSA comparison needs to include information such as the rate of interest or characteristics that may be anticipated for the offered products, the yearly cost associated with maintaining accounts, costs associated with making trades and transferring funds, fund management costs, redemption restrictions, investment options, and availability of professional guidance.
As far as cash and GIC products are concerned, it is important for the purchaser to look at the rate, duration, maturity date, and withdrawal terms. As far as the mutual funds and ETFs are concerned, it is not their past return, but fees and risk.
No genuine company can guarantee future returns for market-based investments.
Using An FHSA With The Home Buyers’ Plan
An eligible individual is free to withdraw money from both an FHSA qualifying withdrawal and an RRSP Home Buyers’ Plan to buy the same qualifying property, if both plans meet their respective criteria.
There is one major benefit that the FHSA withdrawal provides: there is no repayment required. Withdrawals under the HBP are governed by repayment requirements.
Taking out from both accounts will provide the buyer with more money for a down payment, but he should also take into account such costs as closing costs, land transfer tax, moving expenses, repairs, emergency savings, and homeownership cost.
The down payment should be large enough so as not to deprive the buyer of access to any savings after purchasing a home.
What Happens If You Do Not Buy A Home?
An FHSA does not remain open indefinitely.
The last year in which maximum participation can occur is typically the year of December 31 in which one of three things happens: the 15th year since the first FHSA opened, the year in which the individual reaches 71 years old, or the year after the first qualifying withdrawal.
The property held in the FHSA can usually be transferred tax-deferred into an RRSP or RRIF without being used for the qualifying home purchase, assuming the transfer procedures are met. The non-qualifying withdrawal is typically subject to tax.
Using such an approach when transferring to a retirement program would decrease the fear that the FHSA funds would be lost due to changes in the home-buying plan.
Common Mistakes When Choosing FHSA Investments
A few avoidable decisions can reduce the value of a first time home buyer savings account.
- Taking Too Much Risk Near The Purchase Date: A market decline can reduce the down payment just when it is needed. Risk should normally fall as the buying date approaches.
- Leaving Long-Term Savings Entirely In Cash: Buyers with many years before purchasing may lose growth potential and purchasing power by using only low-return products.
- Choosing A Locked GIC Without Checking The Term: A high rate may be less useful if the money cannot be accessed when a suitable property becomes available.
- Buying One Stock With Most Of The Account: Concentration can make the home purchase depend on the success of one company or sector.
- Ignoring Investment And Account Fees: Trading charges, fund expenses, transfer fees, and currency costs can reduce the final balance.
- Contributing More Than Available FHSA Room: Excess contributions or RRSP transfers can create tax consequences. The FHSA participation room should be confirmed before adding money.
- Opening The Account Too Late: Participation room begins only after the first FHSA is opened, so delaying may reduce the time available for contributions and growth.
Is A Self-Directed Or Managed FHSA Better?
A self-directed FHSA gives the owner the ability to choose and direct the investments that qualify. This is probably for someone who knows something about diversification, investing risks, and transaction costs. According to the CRA, the self-directed FHSA can be created for an investor who wants to create and manage a portfolio.
The managed FHSA can utilize portfolios chosen by the advisor, fund manager, or robo-advisor. This can be better for someone who would rather have another choose investments and manage the portfolio.
Self-directed FHSA is not necessarily cheaper, while managed FHSA is not necessarily safer. The result will depend on fees, investment choices, behavior, risks, and services included.
The structure of the account makes it easier for the owner to pursue a good strategy, not trade excessively.
How To Choose The Best FHSA Investments
Begin by assessing the expected date of buying the house. A shorter time frame would mean making more conservative investments, whereas a longer timeframe might permit you to invest in more diverse investments.
Consider the flexibility of the purchase. The person who is ready to wait for a few years after the downturn in the market will take more risks compared to the one who has to buy a house within a certain timeframe.
Assess your total down payment target, including the closing cost and the emergency cushion. Do not think that all money in the FHSA should be used in aggressive investments just because the account offers you tax-free growth of your money.
Compare the product according to their after-fee value, liquidity, risks, and suitability. Past performance of the product should not be the sole criterion of selection.
Lastly, make a written strategy to reduce risks. It will help you avoid taking rash decisions during the time of crisis.
Final Thoughts
The best FHSA investments are those that match the buyer’s timeline and protect the purpose of the money.
Cash, high interest savings accounts, and short-term GICs may be appropriate options if a purchase of a home is on the horizon. Individuals who have between three to five years may choose both conservative products and investment options for growth. Those who have more than five years may opt for a variety of ETFs and mutual funds, on condition that they are willing to take market risks and develop a strategy of lowering these risks prior to buying a house.
The First Home Savings Account is unique because it allows one to make deductible contributions, shelter gains from taxation, and receive qualifying withdrawals tax-free. Moreover, there is a provision for a tax-deferred rollover to RRSP/RRIF in case a purchase of a home is not made according to program requirements.
The tax advantages of the account are significant; however, investment choices will decide on how safe and effective these savings will get to their destination. Down payment for the first home should be handled in a manner different from retirement savings that are far into the future.
Learn More: How Non-Residents Can Open A Bank Account In Canada