Saving up for a home, especially when mortgage rates and prices are high, takes a lot of time. And while there are several ways to help speed up the process, parking your money in a standard, low-interest savings account isn’t one of them.
If you let your hard-earned income stay virtually stagnant at a 0.5% interest rate, you’re leaving money on the table. This will only prolong your savings timeline. Instead, you should take advantage of high-interest savings accounts that offer better interest rates and tax advantages, so you can pocket more of your money and put it toward your down payment.
If you’re looking to save up for a home, transferring your money to a high-interest savings account (HISA), First Home Savings Account (FHSA), Tax-Free Savings Account (TFSA), or Registered Retirement Savings Plan (RRSP) are all practical ways to get there.
High-Interest Savings Account (HISA)
If you don’t want to worry about contribution limits, repaying withdrawals, or tax rules when saving for a down payment, consider switching to a high-interest savings account.
It’s worth comparing your current savings rate to today’s best HISA rates and limited-time promotional interest offers. Some of today’s highest interest rates include:
- Tangerine Bank: 6% promotional, 1% thereafter
- Wealthsimple: 4%-5%
- Motive Financial: 4.1%
- Laurentian Bank of Canada: 1%-4%
- Oaken Financial: 3.40%
Before choosing an account, you’ll want to weigh factors like the minimum deposit amount, service fees, accessibility, and how interest is calculated on different balances.
First Home Savings Account (FHSA)
The Government of Canada introduced the FHSA on April 1, 2023, to give Canadians a tax-free way to save for their first home.
To open an account, you must be between 18 and 71 years old, a Canadian resident, and a first-time homebuyer. You can contribute up to $8,000 annually, and up to $40,000 over the course of 15 years. Any contribution room you don’t use can be carried over to the next year (up to $8,000).
Your annual contributions can be deducted from your income when you file your taxes, lowering your taxable income. FHSA interest rates vary from bank to bank, ranging from approximately 0.75% to 3%. But most financial institutions offer higher promotional rates for new deposits within a specified time frame. The FHSA can also be combined with a TFSA or RRSP, giving you more contribution room, tax relief, and potential investment growth.
Tax-Free Savings Account (TFSA)
The TFSA is a popular and versatile account that Canadians can use for many reasons, including saving for a home. The interest earned within a TFSA is tax-free. As of 2009, Canadians 18 and older with a valid SIN can open a TFSA. Every few years, the government of Canada posts a new contribution limit. This year, it’s $6,500. But, the limit is expected to reach $7,000 in 2024 due to inflation. Contribution room accumulates every year that you don’t use it, so if you’re just opening a TFSA now, your total contribution room is a sum of all the limits posted since you turned 18.
For example, if you turned 18 in 2013, your total contribution room would be $68,000. However, you can always check your total contribution room via your Canada Revenue Agency (CRA) account.
Unlike the FHSA, your TFSA contributions aren’t tax deductible. But like the FHSA, any withdrawals from the account don’t have to be paid back, so you’re not locking your money in. Keep in mind, though, that if you do withdraw funds, the amount you initially deposited still counts towards your total contribution limit for the year. If you exceed your contribution limit, you’ll be taxed on that amount.
Any bank-to-bank transfers between TFSA accounts shouldn’t trigger this, but making the transfer yourself (e.g. sending yourself an Interac e-transfer to move money from one TFSA to another) will be considered a new contribution that will count toward your limit.
Registered Retirement Savings Plan (RRSP)
Although the RRSP is intended for retirement savings, it can be used to help you buy your first home, too. As part of Canada’s Home Buyers’ Plan (HBP), you can withdraw up to $35,000 (per person in a partnership) from your RRSP to put toward a home, provided you do so in the same year the home is purchased or built.
To be eligible for the HBP, you must be a first-time homebuyer and resident of Canada. You must also have documentation that proves you’ll be purchasing or building a qualifying home, and occupy the home as a primary residence for at least one year. To request a withdrawal from your RRSP through the HBP, you have to fill out form T1036. Once approved, you can take out one lump sum or several withdrawals throughout the calendar year.
Contributions to your RRSP are tax deductible, just like with the FHSA. However, withdrawals under the HBP have to be paid back to the account within 15 years. And while you don’t pay taxes on capital gains while the money is in your account, you will be taxed on earnings when they’re withdrawn.
Choosing a savings account to help you buy a home
While any of the above investment accounts can help fund your first home, choosing the right one boils down to your preferred savings strategy. Do you want to receive tax breaks and potentially earn market gains while balancing contribution limits and withdrawal repayments? Or would you rather have free access to your money without tax implications and solely earn interest with no risk of market losses? The answer can guide you to your ideal home savings plan.
