By Erin Pepler on November 28, 2023
Estimated reading time: 8 minutes

Your FHSA timeline: What to invest in and when

By Erin Pepler on November 28, 2023
Estimated reading time: 8 minutes

A first home savings account can stay open for up to 15 years—so when should you start investing in one, and what happens when those 15 years are up?

A young woman moves plants in her new home

Image by Freepik

Before you make an offer to buy your first home, you’ll have to determine your budget and save up enough money for a down payment (typically about 20% of the home’s value). That’s probably going to be a good chunk of change—Canada’s housing market is expensive, and if you put down less than 20%, you’ll be obligated to buy mortgage default insurance.

Fortunately, there are a number of ways to save for a down payment on your first home, including the first home savings account (FHSA). This registered account was introduced in April 2023 to help first-time home buyers in Canada. And it can be used in conjunction with other government programs including the Home Buyers’ Plan and Home Buyers’ Tax Credit. The FHSA has an annual contribution limit of $8,000, up to a lifetime maximum of $40,000, and the account can stay open for 15 years. Cash and investments held inside an FHSA can grow tax-free, and there’s no tax on FHSA qualified withdrawals.

FHSAs can hold a wide variety of investments, just like with other registered accounts. How your FHSA’s investment portfolio is structured should reflect your personal goals, timeline, financial circumstances and risk tolerance. These factors are likely to change over time, which means your investment strategy should change, too. Here’s why that is and how to plan your investments accordingly—plus, when you should open an FHSA.

What types of investments can an FHSA hold?

Like a tax-free savings account (TFSA) or other registered investment accounts, your FHSA gives you options. You can put cash into the account on a regular basis and earn a bit of interest over time, but if you want to potentially grow your money and keep pace with inflation, there are other options to consider. Here’s a quick overview. For personalized advice, speak to a financial advisor. Note that because an FHSA is a registered account, any capital losses can’t be claimed against capital gains.

Stocks/equities: Stocks, also called equities, represent part ownership in a company. Stocks are traded on stock exchanges. Some companies distribute part of their profits to shareholders in the form of dividends (typically monthly, quarterly or annually). You may also earn capital gains or have capital losses on your stocks at the end of the year.
Mutual funds: Mutual funds are pooled investments that hold a portfolio of securities, such as stocks or bonds. Depending on the securities they hold, mutual funds can earn interest, dividends or capital gains. They can be bought from qualified advisors, brokerage firms and fund companies.
ETFs: Exchange-traded funds are similar to mutual funds in that they’re pooled investments that hold a portfolio of securities. Unlike mutual funds, ETFs are bought and sold on a stock exchange.
Bonds: A government or corporate bond will receive a fixed interest rate for a predetermined period of time, making it a reliable, low-risk investment choice. Your capital is returned when the bond matures at the end of the specified time period, and you’ll earn interest, capital gains or both. Bonds are also sellable on the bond market, which is great for liquidity, but that means a bond’s value can change.
GICs: Guaranteed investment certificates are another low-risk option. Similar to a bond, a GIC is an investment asset with a fixed interest rate and specified maturation date. It’s predictable and, because there’s an end date involved, it’s easy to plan around. And you can even ladder your GICs to buy varying terms and reinvest the growth.

Adjusting your FHSA investments over time

Similar to when you invest in a registered retirement savings plan (RRSP), a registered education savings plan (RESP) or a TFSA, you can review the makeup of your FHSA as needed. You can make changes that reflect your current goals and financial situation.

For example, if you’re hoping to purchase your first home within five years or less, you may want to be fairly conservative with your investments (choosing bonds, GICs, and conservative ETFs and mutual funds, for example). A tight timeline leaves less tolerance for market fluctuations.

On the other hand, if your plan is to buy a home in seven to 10 years’ time or longer, you could consider choosing higher-risk (and potentially higher-reward) investments at first. Over time, and as you approach your savings goal, you could shift your asset allocation towards lower-risk investments. That said, it’s best to stay within your personal comfort zone—if your investment portfolio is keeping you up at night, your asset mix may not be the right fit for your risk tolerance.

One way to reduce risk is through diversification. For example, Fidelity Investments offers All-in-One ETFs that provide exposure to a variety of assets in one investment. This can carry lower risk than holding a handful of individual stocks. You can choose from different asset allocations. A more conservative investor may choose a higher allocation to fixed income, like in Fidelity’s All-in-One Conservative ETF (ticker symbol FCNS). Someone with a higher risk tolerance (or a longer savings timeline) may want all equity, like in Fidelity’s All-in-One Equity ETF (FEQT). The approach is up to you. (Read more about Fidelity’s All-in-One ETFs.)

Where (and when) to open an FHSA

The FHSA is available through Fidelity Investments and other financial institutions. To qualify, you must be a first-time home buyer in Canada who is at least 18 years old but not older than 71.

Your FHSA contribution room begins growing as soon as the account is open, so it’s best to open one as soon as possible—even if you don’t have much money to invest right away. Speak with your financial advisor about opening an FHSA and for more information on the types of investments you can hold within it.

What happens if you don’t use your FHSA within 15 years?

Investing in your financial future is always a good decision, but it’s important to remember that life happens and plans sometimes change. If you don’t end up purchasing a home within 15 years of opening your FHSA, or you purchase a home using other funds for the down payment, you’ll have to make a decision about what to do with the money in your first home savings account.

You have two options:

Withdraw the funds. The amount will be added to your taxable income for the year.
Transfer the funds to an RRSP or a RRIF. This won’t affect your contribution room in those accounts.

What’s right for someone else may not be right for you, so speak to an advisor before withdrawing or transferring funds from your FHSA. These are important decisions, and they deserve careful consideration and personalized advice.

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About Erin Pepler

Erin Pepler is a freelance writer based in the Toronto area. A frequent contributor to MoneySense, she is also the author of Send Me Into The Woods Alone: Essays on Motherhood.