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Key takeaways:
If you dream of owning a home but need extra help saving for a down payment, there's good news. First-time homebuyers can use both a First Home Savings Account (FHSA) and a Home Buyers’ Plan (HBP) to help towards the purchase of their first home.
Read on to learn more about how FHSAs and HBPs work, and how to reap the benefits of these accounts.
The First Home Savings Account is designed to help Canadians save for their first home.
The government launched this tax-free savings account in 2023. You can contribute up to $8,000 per year, for a total lifetime contribution of $40,000, toward a qualifying home purchase.
If you fall short in contributions one year, you won't miss out. You can carry up to $8,000 of your annual contribution room forward to the next year.1 (Keep in mind that over-contributions are subject to a 1% tax per month on the excess funds for as long as they remain in your account.)
FHSAs also offer valuable tax benefits. Like a Tax-Free Savings Account (TFSA), the money you invest grows tax-free. But the contributions you make are tax-deductible, like a registered retirement savings plan (RRSP).
You can make either a single withdrawal from your FHSA or multiple withdrawals. But before you can start making withdrawals, you have to fill out the form “RC725 Request to Make a Qualifying Withdrawal from your FHSA" for each withdrawal you make.2
If you withdraw from your FHSA for something that is not considered as a qualifying withdrawal, those funds become taxable.
FHSA eligibility
To qualify for an FHSA, you must be:
- A Canadian resident
- At least 18 years old or 19 depending on your province (but not turning 71 or older within the calendar year)
Plus, you or your spouse cannot own a home that you live in the year you open an FHSA or during the previous four calendar years.
A few other rules you need to follow:
- The property you purchase must be in Canada.
- The house must be built or bought by October 1 of the year following your withdrawal.
- You have to close your account after 15 years or when you turn 71, whichever is earlier.
The Home Buyers’ Plan (HBP) is a popular program that allows first-time homebuyers to withdraw money from an RRSP to buy or build a home for either themselves or a person they're related to who has a disability.3
An HBP lets you withdraw up to $60,000 from your RRSP within a single tax year for a first-time home purchase.
If you have a partner and you’re both eligible for an HBP, you can combine withdrawals, up to $120,000.
Before you make a withdrawal, you have to fill out the form “T1036 Home Buyers' Plan (HBP) Request to Withdraw Funds from an RRSP" for each account you own.4
To qualify for the Home Buyers' Plan, you must be:
- A Canadian resident
- A first-time homebuyer
- Buying or building a home that will be your principal place of residence, or the person with the disability must live in the home within the first year
Other rules you need to follow:
- The property must be in Canada.
- The house must be built or bought by October 1 of the year following the withdrawal.
- You'll have five years before you need to begin repaying the funds to your RRSP. Once repayments start, you'll need to make at least the required annual repayment. If you don't repay the minimum amount, the shortfall will be added to your taxable income for that year.
- You need to fully repay the amount you withdrew from your RRSP within 15 years.
While both an FHSA and HBP can help you buy your first home, they’re not the same.
The biggest difference is that you have to pay back the amount you withdraw from your RRSP through the HBP. That’s because, essentially, you’re giving yourself an interest-free loan from your retirement savings. But you have five years before you’re required to begin making repayments, and up to 15 years to pay back what you have withdrawn.
But with an FHSA, there’s nothing to pay back. Since FHSA contributions are tax-deductible and withdrawals are tax-free, you're not repaying anything. You simply use the money you saved toward a qualifying home purchase.
As long as you're eligible and follow the rules and repayment requirements, you can reap the benefits of both accounts.
Combining FHSA and HBP can help you save for a down payment faster. And there’s no rule about using funds from an FHSA and an HBP for the same qualifying home purchase.
Scenario: A couple saving for a house
Let's say a couple is looking to buy a house in Canada worth $750,000. They’ve never owned a home before — either alone or together — and are both Canadian residents and reached the age of majority.
For a 20% down payment, they need to save $150,000 — 20% of $750,000.
Each partner has their own FHSA and RRSP from which they can withdraw funds through the HBP.
By taking $60,000 each from their HBPs and $40,000 from their FHSAs, they can both contribute $100,000. This gives them a combined total of $200,000 — $100,000 x 2.
By making regular contributions to their FHSAs and RRSPs over the years, this couple optimized saving for a down payment.
Homeownership may seem out of reach as home prices and inflation are making it challenging to buy a home. But by leveraging both the FHSA and the HBP, you're one step closer to buying your very first home. You can work with a Scotia Advisor to come up with a financial plan to make this dream a reality.
