FHSA vs RRSP Home Buyers' Plan: which should you use first?

As a mortgage broker in Burnaby, BC, I often hear from first-time homebuyers who are diligently saving for a down payment. It's a significant financial undertaking, and navigating the various savings vehicles available can feel like a maze. Fortunately, Canada offers two powerful programs designed to help you reach your homeownership dreams sooner: the First Home Savings Account (FHSA) and the RRSP Home Buyers' Plan (HBP). Both allow you to save for a down payment with significant tax advantages, but they work quite differently. Understanding these differences and how to best utilize them is key to maximizing your savings.

Understanding the First Home Savings Account (FHSA)

The FHSA is a relatively new player on the scene, launched in April 2023, and it's quickly become a favourite for first-time buyers. It essentially combines the best features of an RRSP and a TFSA, offering a "triple tax advantage."

Here's how it works:

• Eligibility: To open an FHSA, you need to be a Canadian resident, at least 18 years old (or the age of majority in your province), and a first-time home buyer. This means you haven't lived in a home you owned (or jointly owned) in the current calendar year or the preceding four calendar years.
• Contribution Limits: You can contribute up to $8,000 per year to your FHSA, with a lifetime contribution limit of $40,000.
• Carry-Forward Room: If you don't use your full $8,000 annual contribution room, up to $8,000 of that unused room can be carried forward to the following year. This means in some years, you could contribute up to $16,000 if you had $8,000 carried forward from the previous year.
• Tax Deductibility: Contributions you make to your FHSA are tax-deductible, reducing your taxable income for the year, much like an RRSP. This can result in a significant tax refund, which you can then reinvest in your savings!
• Tax-Free Growth and Withdrawals: Any investment growth within your FHSA is tax-free. Even better, qualifying withdrawals made to purchase your first home are completely tax-free, and you don't have to repay them. This is a major advantage over the RRSP HBP.
• Account Lifetime: Your FHSA can remain open for a maximum of 15 years, or until you turn 71, or until the end of the year following your first qualifying withdrawal, whichever comes first.
• Qualifying Withdrawal Conditions: To make a tax-free withdrawal, you must have a written agreement to buy or build a qualifying home in Canada by October 1 of the year after your withdrawal, and you must intend to occupy it as your principal residence within a year of buying it. You also need to be a first-time home buyer at the time of withdrawal.

The RRSP Home Buyers' Plan (HBP)

The RRSP Home Buyers' Plan has been around for much longer and allows you to "borrow" from your Registered Retirement Savings Plan (RRSP) for a down payment.

Here are the key features:

• Eligibility: You must be considered a first-time home buyer, meaning you haven't owned a home that was your principal residence in the four calendar years before your withdrawal.
• Withdrawal Limit: You can withdraw up to $60,000 from your RRSP, tax-free, for a down payment. If you have a spouse or common-law partner who also qualifies, they can withdraw up to $60,000 from their own RRSP, for a combined total of $120,000.
• 90-Day Rule: The funds you intend to withdraw must have been in your RRSP for at least 90 days before you can take them out under the HBP.
• Repayment Obligation: Unlike the FHSA, the HBP is essentially an interest-free loan to yourself that you must repay to your RRSP. You have 15 years to repay the withdrawn amount, with repayments typically starting in the second year after your withdrawal. If you don't make your scheduled repayments, the missed portion becomes taxable income for that year.
• Tax Deductibility of Contributions: Contributions to your RRSP are tax-deductible, reducing your taxable income.

FHSA vs. RRSP HBP: Which to Use First?

This is the million-dollar question, and for most first-time buyers, the answer is clear: prioritize the FHSA.

Here's why:

• No Repayment Required for FHSA: The biggest advantage of the FHSA is that qualifying withdrawals are truly tax-free and do not need to be repaid. With the HBP, you're essentially borrowing from your retirement savings, and you have to pay it back.
• "Triple Tax Advantage" of FHSA: The FHSA offers tax-deductible contributions, tax-free growth, and tax-free withdrawals. No other registered account in Canada provides all three of these benefits for home buying.
• Flexibility with Existing RRSP Savings: If you already have substantial savings in your RRSP, the HBP can still be a valuable tool to access those funds for a down payment. However, it's often more strategic to maximize your FHSA first.

The Power of Combining Both

The best strategy for many first-time homebuyers is to use both the FHSA and the RRSP Home Buyers' Plan. This "stacking" approach can significantly boost your down payment and tax savings.

Here's a common strategy:

1. Maximize your FHSA first: Contribute the annual maximum of $8,000 to your FHSA each year. This gives you the immediate tax deduction and allows your savings to grow tax-free, with no repayment obligation on withdrawal.
2. Use FHSA tax refunds to fund your RRSP: The tax refund you receive from your FHSA contributions can then be contributed to your RRSP. This creates a powerful cycle of tax-advantaged savings.
3. Withdraw from FHSA first at purchase: When it's time to buy, withdraw the funds from your FHSA first, as there's no repayment required.
4. Then, utilize the RRSP HBP: If you need additional funds for your down payment, you can then withdraw up to $60,000 from your RRSP under the HBP. Remember, these funds will need to be repaid over 15 years.

For a couple, this combined strategy could potentially unlock up to $200,000 in tax-advantaged funds for a down payment ($40,000 each in FHSA, and $60,000 each via HBP).

Other Important Considerations for BC First-Time Buyers

Beyond these federal programs, there are provincial considerations that can further impact your home-buying journey in British Columbia:

• BC Property Transfer Tax (PTT) Exemption: As a first-time home buyer in BC

Related mortgage resources

• Explore my free intake for me to review to see where you stand with no obligation.
• Explore my home purchase planning to plan a confident purchase.
• Read Buying Your First Condo in Burnaby: A Practical Family Guide for Metro Vancouver Buyers for a related BC mortgage perspective.