If a lack of extra cash is turning you off of considering a First Home Savings Account, some experts say it might still be worth opening one before the year comes to a close.
In fact, Ratehub.ca’s business director of everyday banking, Natasha Macmillan, encourages young Canadians in particular to open an FHSA as soon as possible — if for no other reason than to maximize the account’s contribution limit sooner rather than later.
“FHSAs hit the market in April of this year as another registered savings account available to Canadians, where anyone who hasn’t yet bought a property can put away up to $40,000 tax-free for the purchase of their first home,” she said.
The lifetime maximum of an FHSA is $40,000 and you can contribute up to $8,000 to the account every year.
Individuals are allowed to carry forward unused portions of their annual contribution limit into a subsequent year, on top of the $8,000 available for that future year.
Macmillan says it can be worthwhile even for those who can't find the maximum $8,000.
“Even if you’re not in a place to financially contribute anything substantial — or anything at all, for that matter ... opening the account is still a great way to secure more of an opportunity for savings in the future when you’re ready to make use of it,” she said.
“That way, you’re not starting from ground zero by the time you’re making enough to contribute a lot, and don’t find yourself in a place where you could put a significant amount in the account and take advantage of that tax benefit but are limited by that $8,000.”
Jaren Malina, a fifth-year food business management student at the University of Alberta, opened an FHSA this year with a similar strategy in mind. Though he has only contributed $100 so far, he said just the act of opening the account felt like a useful investment in his financial future.
“The way I see it is as a way to increase how much I can save while keeping it tax deductible, like an extension of my TFSA,” he said.
“And hopefully, home ownership or a real estate investment is something that will be possible for me, so having it open earlier means I’ll have more room to save later on.”
According to Macmillan, the main disadvantage of FHSAs is that account holders must purchase a house within 15 years of opening one.
“However, you can roll your FHSA contributions into your RRSP at any point without affecting your RRSP contribution room,” added Macmillan.
Furthermore, Macmillan emphasized the importance of knowing one’s risk appetite when choosing whether to use an FHSA or a different type of account to save or invest.
“For someone in a bit of a more uncertain financial space, like a student, I’d say opening a standard savings account is probably the best route,” she said. “If you do choose to invest, be conservative with it and go with a platform with low fees.”
For the working millennial or gen Z with a regular income, investments that require a longer-term commitment — like a guaranteed investment certificate, which can earn a solid return but can’t be touched for a specified period — might be more reasonable.
For now, Malina is focusing on his TFSA contributions, given the account’s flexibility with withdrawals aligns better with the financial precariousness of being a full-time student and soon, entry-level professional.
“The way I view it, (FHSAs) are more of a great secondary investment vehicle,” he said.
“Once I get to a point where I’m able to max out my yearly TFSA contribution limit, I think the FHSA will be where I put any extra money I have to save.”
In terms of when Malina expects to buy his first house, he noted it’s unlikely to happen any time soon. Nevertheless, he hasn’t let the cynicism some of his peers feel toward the housing market prevent him from taking tangible steps toward making home ownership a reality.
“A lot of people might think there’s no point to saving based on housing prices in Canada,” he said.
“Obviously, there's fairness to that but I think it's important for people to do the best they can in the situation they’re in to build up some (security) for themselves.”
This report by The Canadian Press was first published Sept. 26, 2023.
Pascale Malenfant, The Canadian Press