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If home ownership is on your list of goals, then investing may need to be part of your plans to get there. When it comes to purchasing a home and investing there are two main options available to Canadians; the RRSP Home Buyers’ Plan (HBP), and the First Home Savings Account (FHSA). So, what’s the difference between them and how does each work?
Before we begin, a quick reminder that the Nova Scotia Securities Commission does not provide investment advice. We are not advising or recommending that investors enroll in the HBP or open an FHSA. This post is simply to educate investors on these options so they can be an informed investor when making investment decisions.
Let’s start by looking at the HBP. The HBP allows investors to withdraw money from their RRSP account to purchase or build a home. To qualify for the HBP:
- You and your spouse or common-law partner must not have lived in a home that you owned in the preceding four years.
- You must intend to use the property as your principal residence within one year of buying or building it.
- You must have a written agreement to buy or build a qualifying home
Under current HBP rules the maximum amount you can withdraw from your RRSP is $60,000. Couples can withdraw up to $120,000 combined. Whatever money you withdraw, you must pay it back to your RRSP. The repayment period begins two years after the year you made your first withdrawal from your RRSP(s) under HBP. If you made the withdrawal in 2026 your repayment period would begin in 2028.
You have up to 15 years to repay the borrowed amount and every year you must repay at least 1/15 of the total amount withdrawn. For example, if you were to withdraw $15,000, you have 15 years to pay it back, and each year you must repay a minimum of $1,000. You are allowed to repay the full amount at any time.
If you fall short of the required annual repayment amount, that missed amount will be taxable income for that year and taxed accordingly.
One other thing to remember regarding repayment: if you make regular contributions to your RRSP account, monthly for example, you must specifically designate these contributions as repayment contributions when you file your taxes for them to count towards your repayment amount.
So, in conclusion, the HBP allows you to withdraw money you have previously contributed to your RRSP early, without penalty, to use toward the purchase of a home. This money must be put back within a specified period of time.
Now let’s look at the FHSA. The FHSA is a special registered account that can hold cash and securities. As the name suggests, it is a registered account to help Canadians save and invest for their first home.
The FHSA has some of the characteristics found in the RRSP and TFSA. Like both accounts, the FHSA has contribution limits. The annual contribution limit for an FHSA is $8,000. The lifetime contribution limit of an FHSA is $40,000. There is also a time limit connected to an FHSA. From the day you open the account an FHSA must be used within 15 years and cannot be held open by anyone over 71 years old.
Like an RRSP, all contributions made to an FHSA are tax deductible. That means when you contribute to an FHSA you can deduct that amount from your taxable income and possibly set yourself up for a tax refund.
Like a TFSA, all investment growth in an FHSA and all withdrawals from an FHSA are tax free. Securities that are eligible to be held in a TFSA can also be held in an FHSA. This includes stocks, bonds, mutual funds, exchange-traded funds, and GICs. For a full list of what can be held in an FHSA contact the Canada Revenue Agency.
So, in conclusion, an FHSA is a special account used to save and invest for your first home, which has tax benefits to allow you to potentially increase the amount of your downpayment faster.
If you’re a prospective homeowner, the FHSA or the HBP may be the right option to help you achieve home ownership more quickly. One other thing to remember is that you could also take advantage of both should you choose to do so and you already have funds in an RRSP.
When creating your home ownership plan you should review both the FHSA and HBP. Determine if one or both is right for you and fits into your financial plan and management. You should consult with a registered adviser and tax professional for advice on which plan is best for you and your individual situation.