The Canadian housing market is red-hot, making the dream of homeownership seem out of reach for many. However, aspiring homeowners now have a new ally: the First Home Savings Account (FHSA).
Despite what its name might suggest, the FHSA is more than just a simple savings account. It’s a versatile investment tool, similar to the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP), meaning you’re not limited to just holding cash.
Here’s everything you need to know about how to safely invest a $8,000 FHSA contribution with low risk, helping you get closer to owning your dream home.
Key points
- The FHSA is a unique savings tool for Canadians aiming to buy their first home, blending features of both the TFSA and RRSP, with eligibility criteria and contribution limits tailored to assist with your homeownership journey.
- You can hold various investments in an FHSA, including cash, but to counteract inflation and grow your savings, options like funds, stocks, high-interest savings accounts (HISAs) and Guaranteed Investment Certificates (GICs) are also available.
- Investing safely in an FHSA means focusing on low-risk options that ensure your down payment is not only secure but also growing steadily, ready for when you decide to purchase your home.
What Is The FHSA? How Does It Work?
The FHSA is a bit like mixing the best parts of two other savings accounts you might have heard of: the TFSA and the RRSP.
To open an FHSA, you need to live in Canada, be 18 or older, and be looking to buy your first home. This account is great because it’s open to lots of people who want to get into the housing market.
Here’s how it works with putting money in: every year, you can add up to $8,000 until you reach a total of $40,000. If you don’t put in $8,000 one year, you can catch up the next year. However, do note that you can only carry forward the previous year’s unused contribution room. For example, if you open an account in 2024, but don’t contribute till 2026, you’ll only be able to contribute up to $16,000 and not $24,000 (3 years x $8,000).
The account can stay open for up to 15 years, or until the year you turn 71.
Benefits Of A FHSA
One of the cool things about the FHSA is it can save you money on taxes like an RRSP account. When you put money in, you can subtract that amount from your income when you do your taxes. For instance, if you make $60,000 and you add $8,000 to your FHSA, when tax time comes, it’s like you only made $52,000, so you pay less tax.
Moreover, just like with a TFSA, any money you make in the FHSA from investments (like if the stocks you picked do really well) doesn’t get taxed. This helps your savings grow faster because you keep all the money it makes.
And here’s the best part: when it’s time to buy your house, you can take out all the money you saved, plus any extra it made, and you don’t have to pay any tax on it. This means every penny you’ve saved and earned is yours to help buy your home.
What Investments Can You Hold In A FHSA?
You can certainly keep cash in your FHSA, but it’s essential to remember that due to inflation, cash that isn’t invested tends to lose value over time.
Think of inflation as the gradual increase in prices for things we buy, from groceries to gas. When prices rise, the buying power of your cash decreases. This means if you just let your cash sit idle in your FHSA, it won’t buy as much in the future as it does today.
Thankfully, the FHSA allows for other types of investments that can potentially earn a better return, helping to protect your savings from the eroding effects of inflation. Here’s a quick look at what’s allowed:
Stocks
When you buy stocks, you’re purchasing a small piece of ownership in a company. If the company does well, the value of your stocks can go up, and you may even receive periodic payments called dividends.
Canada Savings Bonds and Provincial Savings Bonds
These are secure, low-risk investments issued by the Canadian federal or provincial governments, offering a fixed rate of return over a specified period.
Guaranteed Investment Certificates (GICs)
GICs are a safe investment where you lend money to a financial institution such as a bank for a set period, and they guarantee to return your money with a bit of interest.
Mutual funds and exchange-traded funds (ETFs)
ETFs are pools of money collected from many investors to invest in a mix of stocks, bonds, or other assets, which can provide you greater diversification – e.g., not all of your eggs are in one basket.
How To Invest In A FHSA Safely
When we talk about risk in investments, imagine it as that uneasy feeling you get when the value of your money bounces around, or worse, when it could disappear entirely and not come back.
For instance, if you bought shares in a well-known company like Apple, you might see its stock price change from day to day. On the other hand, investing in a company like Bed Bath & Beyond before it went bankrupt would mean losing all the money you put in.
With Your FHSA, Playing It Safe Is A Smart Move
Why? While taking on more risk can lead to higher returns, it’s not the best approach if you’re planning to buy a house soon or in a few years. You’ll want your down payment to grow steadily and securely, ensuring it’s there when you need it.
To put it simply, the best safe investment choice in your FHSA depends on how soon you’ll need the money.
High Interest Savings Account (HISA)
If you’re looking to buy in the near future, a high-interest savings account within your FHSA might be your best bet.
A HISA is a special savings account that pays you interest on the money you have parked in it. It’s a safe option, often insured, and gives you the flexibility to withdraw your money whenever you need it—like when your dream home suddenly becomes available.
Guaranteed Investment Certificate (GIC)
On the other hand, if you have a year or a few years before you plan to buy, consider investing in a Guaranteed Investment Certificate.
A GIC is a very straightforward investment where you lend your money to a bank or financial institution for a certain period and lock it up, and they promise to pay you back with a bit of interest.
The key is to pick a GIC that lines up with your home-buying timeline. For example, if you’re aiming to buy a home in four years, you might choose a 3-year GIC and then move your money to a HISA in the last year, keeping it accessible and continuing to earn interest safely until you’re ready to buy.
Make Sure It’s Insured
Both HISAs and GICs are considered safe. Why? Because you can’t lose the money you put in them. This security comes from being insured by the Canada Deposit Insurance Corporation (CDIC).
So, even if the bank where you have your FHSA goes bankrupt, your money up to a certain limit is protected and safe. This means you can rest easy knowing your down payment is secure and growing, waiting for when you’re ready to buy your first home.
