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First-time home buyers in Canada can pull from savings in registered accounts to fund their down payment. Here’s how to combine FHSA and RRSP withdrawals.
My partner and I plan to buy a $600,000 home in two to three years with a 20% down payment. Can we each use $40,000 from our FHSAs and $60,000 from our RRSPs through the Home Buyers’ Plan, even though we would only need $120,000 for the down payment? We would use the additional $80,000 for any necessary renos. Over the next few years, we would continue investing in our RRSPs and invest the tax refunds in our TFSAs, even though we plan to eventually pull the full $120,000 from our RRSPs, instead of keeping that money locked in.
—Ryan
A first-time home buyer can mix and match different accounts to fund their home down payment. The recently introduced first home savings account (FHSA) is primarily for an eligible home purchase. Through the Home Buyers’ Plan (HBP), you may also be able to withdraw from a registered retirement savings plan (RRSP) up to certain limits. Tax-free savings accounts (TFSAs) are flexible accounts that can also be used with no requirement to repay what you withdraw.
So, what is the right combination of accounts, and what strategy should you follow to maximize them?
You mention a target 20% down payment, Ryan. There’s some significance to this for others reading along. If your mortgage is no more than 80% of your purchase price, your closing costs to purchase will be less.
If you come up short of a 20% down payment, you will typically need to pay for mortgage default insurance. This can cost between 0.6% and 4.5% of your mortgage balance. So, although you can buy a house in Canada with a down payment as small as 5%, your closing costs could be less, if you can get to that magic 20% level.
FHSAs were introduced in 2023. An eligible first-time home buyer who has not owned a home in at least four years can contribute up to $8,000 annually and $40,000 in total to the account. Contributions are tax-deductible, and withdrawals for the purchase of a qualifying home are tax-free.
To clarify, Ryan, you mention taking a $40,000 FHSA withdrawal. There is no limit on the amount you can withdraw. There are only the annual and lifetime contribution limits. So, if your investments grow in value, you should have more than $40,000 available to withdraw to purchase a home. Same for your partner. You are simply each capped at contributing $40,000 to your accounts.
The HBP was introduced in 1992, long before the FHSA. After an increase to the withdrawal limit in 2024, a first-time home buyer who has not owned a home in at least four years can now withdraw up to $60,000 from their RRSP to purchase an eligible home.
So, unlike the FHSA, there is a withdrawal limit on the HBP.
You can double up on FHSA and HBP withdrawals. There are no restrictions on using both programs, whether you’re buying a home by yourself or with another person.
However, there are some differences between an HBP RRSP withdrawal and an FHSA withdrawal that may give the FHSA a slight advantage when planning to buy a home.
First, if you don’t use an FHSA, you lose out. Unlike RRSP contribution room, FHSA contribution room does not carry forward once you have purchased a home. You can requalify for an FHSA as a first-time home buyer if you do not own a home for at least four years, but if you become a home owner and stay a home owner the rest of your life, you may lose the only opportunity to use the account.
Second, once you take a withdrawal from your FHSA, that’s the end of the story. There’s no repayment requirement.
HBP withdrawals from your RRSP, however, have strings attached. You need to repay 1/15th of the withdrawal every year for 15 years. Repayments generally start two years after the withdrawal, but there’s temporary relief for withdrawals before December 31, 2025, that allows repayments to begin in the fifth year after the withdrawal.
If you don’t repay the required amount in a given year, any shortfall is added to your income in that year. So, unlike an actual loan, you aren’t required to repay the full amount withdrawn through the HBP. But you do pay tax on any unpaid amount that’s come due, and you lose the ability to recontribute that sum to your RRSP forever.
When you take an eligible withdrawal from your FHSA or from your RRSP using the HBP, you do not need to use the withdrawal specifically for your down payment. Practically speaking, most home buyers will use the withdrawals directly or indirectly for their down payment, but technically the only requirement to take a withdrawal is that you are buying an eligible home.
So, in your case, Ryan, you could certainly hold back some of your withdrawals to use for a renovation. If the renovation will not be immediate, consider putting the excess into your TFSA if you have room so that any interest remains tax-free.
Your plan to invest tax refunds from your FHSA and RRSP contributions into your TFSAs, Ryan, makes sense to me. I would prioritize maxing out your $8,000 annual FHSA contributions first, followed by targeting up to a $60,000 balance in your RRSPs. If you still have funds to set aside, they can go into your TFSAs.
When investing, I would be careful with your asset allocation and level of risk in the accounts as you approach a potential purchase date. Stocks usually go up, but once you get under a five-year time horizon, and particularly within a year or two, the likelihood of stocks being lower than they are today increases materially. So, reduce your risk as your time horizon shortens.
Good luck with your savings plan and home search, Ryan. Home prices are still quite high relative to incomes in many parts of the country. This dynamic, combined with already high debt levels and more sustainable interest rates, will probably keep prices from rising much and help renters become home owners over the next few years.
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