First home savings account: A Gen Z guide to achieving home ownership

While Gen Z face many hurdles at the moment, including rising interest rates and inflation, there are still ways to achieve home ownership. In our current economic climate, where many young people feel they will be lifelong renters, the introduction of the new tax-free first home savings account (FHSA) will provide some much-needed assistance.

How does the FHSA work?

The FHSA is a new kind of registered account, like the tax-free savings account (TFSA) and registered retirement savings plan (RRSP). You can contribute up to $8,000 annually toward your FHSA, up to a lifetime limit of $40,000. Contribution room begins to accumulate after you open the account, and you can carry forward any unused portion from one year to the following year, for a maximum contribution of $16,000 in a given year. Another benefit is that contributions to an FHSA are tax-deductible (like an RRSP) and withdrawals are tax-free (like a TFSA). 

Am I eligible for the FHSA?

To qualify for the FHSA, you need to be a Canadian resident who is at least 18 years old. Upon opening the account, you must also qualify as a first-time home buyer and not have lived in a home that you or your spouse or common-law partner owned in the last four calendar years. 

What rules do I need to follow?

Here are some things you’ll need to keep in mind when you open an FHSA:

• After withdrawing money from the account, you must purchase a home by Oct. 1 of the following calendar year, or the funds will be taxed as income.
• The home that you purchase must be located in Canada.
• You are required to close the account after 15 years or at the end of the year you turn 71—whichever comes first.
• If you don’t use the money to buy a home, you can transfer it to your RRSP.
• Unlike with the Home Buyers’ Plan (HBP), you don’t need to repay money withdrawn from an FHSA.

Create an FHSA savings plan

Once you’re ready to open an account, you’ll want to have a savings plan. The average home price in Canada was $662,437 in February 2023, according to the Canadian Real Estate Association (CREA), and in the areas of Greater Toronto and Greater Vancouver, the average price was a whopping $1,091,300 and $1,123,400, respectively. The area you want to live in and the type of property you want to buy (such as a townhouse or a condo) will determine your price range. 

From there, you will need to determine the size of your down payment. Homes valued at $1 million or more require a minimum down payment of at least 20%, and homes worth less than that require a down payment of 5% to 10%.

Here’s an example of how you would determine your own savings goal:

Since you can contribute a maximum of $40,000 to an FHSA, you’ll have to spread out the remaining $80,000 across other accounts, such as an RRSP (for use with the HBP) and a TFSA. For the HBP, you can pull a maximum of $35,000 from your RRSP (or a maximum of $70,000 for a couple buying a home together). So the balance of $45,000 will have to come from your TFSA. Let’s break this down further to determine how much money you’ll need to save in each account: 

Note, these calculations assume you are buying a home as a single person, and they do not factor in investment growth that may come from holding investments like stocks, guaranteed investment certificates (GICs) and bonds. They also don’t factor in potential investment losses. Benefiting from investment growth or buying a home with someone else could help you reach your goal faster, while investment losses may force you to delay buying the home you want.

Ways to start contributing to your FHSA

Once you understand how much you need to save based on your timeline, you can start stashing away money in your account. Beyond putting aside a predetermined amount from every paycheque, consider adding income from these sources to your FHSA:

• Any income tax refund you may receive
• Any bonus, tips or commission earned from your job
• Any monetary gifts from family and friends (everything from birthday money to an early inheritance)
• Any money earned from a part-time job or side hustle

What type of investments can I have in the FHSA?

The investments you can hold in your FHSA are the same as for your TFSA. This includes securities such as stocks, corporate and government bonds, GICs and mutual funds.

The securities that are best for you will depend on a few factors. For one, there’s your time horizon. How many years from now do you plan to buy your home? Another factor is your risk tolerance. How much can you tolerate changes in the stock market? Let’s look at two different scenarios and how they may impact your investment choices. 

Scenario #1

If you are in your early 20s and don’t plan to buy a home until your early 30s, then you have about a decade to save up for it. If you’re comfortable with a medium level of risk, buying index funds and bonds may provide decent returns over a long period of time—just enough to ride out the waves of the stock market. 

Scenario #2

Say you are in your mid-20s. You’re looking to buy a home within the next five years and you have a low risk tolerance (since you don’t want to lose your hard-earned money!). In this situation,  you may opt to buy GICs, which are low-risk and guarantee your initial investment back with interest. Currently, you can find GICs offering a 5% interest rate. This may be a decent option compared to leaving your money in cash, where it risks losing its value to inflation.

Different strategies to optimize your FHSA

There’s no right or wrong way to save money within your FHSA. Here are a few different ways you can use your account. 

1. Contribute to it even if you don’t expect to buy a home

You may be sitting on the fence about whether you’ll actually spend the money on a home. You’ll be happy to know that you’ll have the option to transfer the unused amount into your RRSP on a tax-deferred basis if you decide to forgo buying a home. If you plan to max out your RRSP before retirement, the FHSA essentially creates $40,000 of additional RRSP contribution room over your lifetime. You will still have to be careful not to exceed your annual RRSP contribution limit. The extra room is only created by moving your FHSA savings to an RRSP.

2. Save early

In order to maximize the account’s growth potential, you’ll want to start contributing as much as you can as early as possible. This way you can take advantage of compounding interest. This will help make it easier for you to achieve your savings goal.

3. Consider your income level

Take advantage of the FHSA’s tax deduction potential. For example, you can reinvest the tax refund created by your FHSA contributions into your TFSA. However, remember that contributing to a TFSA instead of an FHSA or RRSP may be better if you don’t have a high income (and wouldn’t benefit from tax deductions). This is especially true if you might need the money for something other than a home, such as a car or a wedding. So, consider your income and the tax implications of each account type. In some cases, it may be more beneficial to stick with your TFSA.

4. Use all the accounts at your disposal

You are able to use the FHSA in conjunction with the HBP. This means you could potentially combine $40,000 from the FHSA with the $35,000 from the HBP for total of $75,000. In most cases, $75,000 will still not be enough for a down payment on a property. So, you may also want to consider adding the amount from your TFSA on top of it.

Laying the foundation for your future

Once it launches this year, the FHSA could help you lay the financial foundation for (what will most likely be) the biggest purchase in your lifetime. Combining the FHSA with money from other accounts, such as your RRSP or TFSA, will help, but realistically, you may still not have enough for a down payment—especially if you plan to live in a big city. Still, the FHSA is another savings tool that can help you on your journey to becoming a home owner. 

Read more Making It columns:

• Canada’s $10-a-day daycare program: A guide for families
• Working towards your dream lifestyle? Here’s how financial goals can help
• Take control of your finances with these budgeting tips for young adults
• How to improve your credit score

About Sandy Yong

Sandy Yong is a personal finance writer, TEDx and Keynote speaker, and the award-winning author of The Money Master. She’s been featured in hundreds of media outlets including CTV News, Global News, Forbes, The Globe and Mail and The Toronto Star.

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