Over the past few years, house prices have seen staggering growth, rising significantly faster than average incomes and making the dream of homeownership increasingly difficult. Rising interest rates and relentless competition are also contributing to a sizzling market and exacerbating the age-old issue of saving for a down payment. This is especially true for first-time homebuyers who aren’t able to rely on the proceeds from a previous sale.
Saving enough to enter the highly coveted housing market, especially in today’s record-setting environment is no easy feat. Fortunately, there are a number of opportunities below to help pave the way.
RRSP Home Buyers’ Plan (HBP)
Established some 30 years ago, the HBP enables you to access funds accumulated in your registered retirement savings plan (RRSP) to help finance the purchase of your first home, tax free. This means the funds you withdraw will not be subject to income tax and won’t be included in your annual income tax return.
You can withdraw up to $35,000 ($70,000 as a couple) and the funds must be repaid within 15 years.
Tax-Free Savings Account (TFSA)
A more recent option and popular among younger, first-timers who may not have accumulated wealth in an RRSP, is using funds from a TFSA. This registered investment account represents a flexible, all-purpose savings tool that allows you to contribute and withdraw from a tax-sheltered account easily and without penalty.
Tax-free withdrawals can be made at any time for any purpose. There are no withdrawal limits, and you aren’t required to repay the amount used – you can simply take from your savings as needed and replenish them if you choose. Keep in mind that there is a limit to the amount you can contribute to a TFSA annually, and you can only replace the amount of any withdrawal in the same year if you have available contribution room.
First Home Savings Account (FHSA) – NEW
Announced in federal budget 2022 as a means to help first-time buyers, the FHSA combines the benefits of both an RRSP and TFSA. Contributions to an FHSA are tax-deductible, like with an RRSP and withdrawals are non-taxable, similar to a TFSA. And because the FHSA is completely tax-free, the account allows for tax-free growth while being held in the account (similar to both RRSP and TFSA).
Scheduled to roll out in 2023, the program allows contributions of $8,000 a year for five years for a total of $40,000. It’s, therefore, best suited for those looking to buy a few years down the road. You can’t carry forward any unused contributions like you can with your RRSP or TFSA nor are you required to repay the funds you withdraw. Since the savings are meant specifically for buying a first home, any amount withdrawn for another purpose will be taxed, similar to an RRSP.
Once you’ve made a withdrawal, you’ll be required to close your FHSA within a year from when the first withdrawal is made. And if you don’t use the funds for a first home purchase within 15 years of opening an account, you’ll be required to close it, transfer the money to an RRSP or registered retirement income fund, or withdraw it as taxable income.
Have questions about your down payment options? Answers are a call or email away!