July 4: First Home Savings Accounts

July 4, 2024

How are things working out with the new First Home Savings Accounts?

For decades, the federal Home Buyers Program offered first-time home buyers a way to fund their down payment – money could be taken out of a registered retirement savings plan to put on the house, with the home buyer given a period of time to repay him or herself.

A more recent program, the First Home Savings Account (FHSA), was launched in recent years by the feds. Let’s have a look at how this program, in which contributions to the plan are tax-deductible but withdrawals are not, works.

Writing in The Globe and Mail, finance columnist Rob Carrick notes that 740,000 people opened a FHSA last year.

“FHSAs are a small-scale but promising example of government policy aimed at helping middle class young people get into the housing market. You can put up to $8,000 in these accounts each year to a maximum of $40,000. Contributions generate a tax refund, and both contributions and investment gains benefit from tax-free compounding and withdrawals. FHSAs are available to people aged 18 and up who did not own a home in the part of the calendar year before an account is opened or the previous four years,” he notes.

While the $40,000 cap, he writes, “is out of synch with the average resale housing price of a bit more than $700,000 in April,” the FHSAs “are nevertheless helping people with middling incomes build down payments for home purchases well into the future.”

Citing federal government statistics, Carrick notes that 44 per cent of FHSA account holders had a taxable income of $53,359 or less. A further 36 per cent of account holders had income in the $53,360 to $106,717 range, he adds.

Launched just last year, the value of all FHSAs topped $2.8 billion, with the average account value listed at $3,900, Carrick writes.

“We are still many years from first-time buyers being able to say their FHSA was a difference-maker in getting into the housing market, but we’re off to a decent start. In 2023, a little over 34,000 FHSA holders made a withdrawal from their accounts More importantly, FHSAs are catching on with exactly the people who will need all the help they can get to buy homes,” concludes Carrick.

An article in Advisor.ca took a look at why some people made withdrawals soon after opening the accounts.

Jacqueline Power of Mackenzie Investments tells Advisor that “it doesn’t surprise me in the least” that some FHSA account holders would “choose to make qualifying withdrawals soon after opening and contributing to the plan.”

“We’re all looking for [tax] deductions these days, any way that we can get one,” Power states in the Advisor article. Qualifying withdrawals from an FHSA allow “an individual to have that deduction and make that tax-free withdrawal.”  

“Launched on April 1 of last year, the FHSA is a registered plan that allows first-time homebuyers to save for a down payment on a tax-free basis. Contributions to an FHSA are tax-deductible, while withdrawals to purchase a first home — including from investment income — are tax-free,” the article notes.

It sounds like a pretty nice program for younger people to consider when saving for a new home.

This author was able to use the Home Buyers Program, where money is transferred out of an RRSP, and then used for the down payment, back in 2008. We are just now repaying the last $1,300 or so, even though the mortgage was paid off in 2021. The one interesting aspect of our use of the HBP was that we chose to “repay” ourselves via contributions to the Saskatchewan Pension Plan! We are now gearing up to start receiving a lifetime annuity from SPP this fall, when we will reach age 65.

It’s another example of how SPP can work for you! Check out Canada’s made-in-Saskatchewan retirement savings solution today!

Join the Wealthcare Revolution – follow SPP on Facebook!

Advisor.ca, The Globe and Mail

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