Tips for Saving a Down Payment for your First Home

Saving up for a down payment on a home requires more than just setting aside a few dollars each month. With the minimum requirement for a down payment of 5% and the price of housing raising your investment strategy will now have to be a bit creative. Canadians have the advantage of several investment savings accounts that can help them reach their homeownership goals faster. These accounts offer tax and interest benefits that are not available with standard savings accounts, making them more advantageous for building a down payment.
 
If you plan to save for a down payment over a longer period, it's more appropriate to invest your money in an investment savings account rather than a low-interest savings account. Savings accounts in Canada typically offer little interest, which means that the value of your savings will decrease over time. To combat this, investing your money can help you keep pace with or even outpace future real estate price increases and maintain the value of your saved down payment.
 
Registered Retirement Savings Plan (RRSP)
A RRSP is a registered retirement savings plan with the federal government that provides tax benefits. Contributions made to an RRSP are exempt from tax, capital gains, and dividends as long as they remain in the plan. However, taxes are usually payable when you withdraw or receive payments from your RRSP. By investing in an RRSP, you can reduce your net income and lower the amount of income tax you pay, offering a tax break.
It's important to note that RRSPs have an annual contribution limit, which means you can only invest a specific amount of your income into the plan each year. While this allows you to save for a home and lower your taxes, keep in mind that each withdrawal will result in a loss of contribution, and tax-free withdrawals are only available through the Home Buyers' Plan (HBP).
The HBP allows first-time homebuyers to withdraw up to $35,000 tax-free from their RRSP to use towards the purchase of a home. However, these funds must be repaid within 15 years. Failure to do so will result in taxation. Many Canadians opt to use their RRSP and the HBP to purchase their first home if they have funds available in their RRSP and are comfortable borrowing from it.
Overall, an RRSP can be a great tool for saving for retirement and for purchasing a home. By taking advantage of the tax benefits and the Home Buyers' Plan, Canadians can maximize their savings potential and achieve their homeownership goals.
 
Tax-Free Savings Account (TFSA)
A TFSA is an account that provides a tax-shelter for a variety of investments. Unlike an RRSP, contributions made to a TFSA do not offer up-front tax breaks, but any savings you put into the account can grow tax-free. Additionally, when you withdraw money from your TFSA, those funds are exempt from taxes. However, similar to an RRSP, there are annual contribution limits for TFSA. In 2022, the limit was $6,000.
A TFSA provides tax-free withdrawals and is not limited to what it can be used for. It also offers flexibility in choosing different investment strategies, including the option to invest in riskier stocks or less risky investments like guaranteed investment certificates (GICs) or mutual funds, all depending on your comfort level.
Whether using a TFSA or an RRSP, it's important to invest your money within these accounts rather than just letting it sit in cash. Many people mistakenly assume that putting cash into these accounts ensures that it is in the best investment, but this is not the case, it's essential to make sure it is invest wisely. This could involve working with a financial advisor to manage your account or investing on your own in a self directed investing account. By investing your funds within your TFSA or RRSP, you can maximize your savings potential and achieve your financial goals.
 
First Home Savings Account (FHSA)
The tax-free FHSA is a recently introduced investment savings account, now available after being announced as part of the Canadian federal government’s 2022 budget. The main purpose of the FHSA is to assist more Canadians in purchasing their first home and making ownership more attainable. This new account incorporates features of both the TFSA and RRSP. Deposits and withdrawals are not taxed, and any investment growth or withdrawn funds are also tax-free. As with the TFSA and RRSP, users can hold cash in the FHSA and contribute up to $8,000 annually, with a lifetime maximum of $40,000. However, the FHSA has a fixed lifespan of 15 years, and any unused contribution room cannot be carried forward, unlike the TFSA. Additionally, unlike the RRSP Home Buyers’ Plan, there is no requirement to repay funds withdrawn from the FHSA for the purpose of buying a home. If the FHSA funds are not used for a home purchase, they can be transferred to an RRSP or a Registered Retirement Income Fund (RRIF).
 
When using multiple saving incentives you can create your savings for a down payment on your first home. So hopefully this can get you started in the right direction of saving and growing your savings for your first home.
 
This information should not be taken as legal or financial advice. This is provided for your information only.