FHSA vs RRSP: What’s Better for First-Time Homebuyers in Canada?

Buying your first home is a major milestone — and a significant financial commitment. For many Canadians, navigating the complex world of savings options can be confusing.

Two popular government-supported savings vehicles for first-time homebuyers are the First Home Savings Account (FHSA) and the Registered Retirement Savings Plan (RRSP) Home Buyers’ Plan (HBP).

Both have distinct features, benefits, and limitations. Understanding the differences is key to making the right decision for your unique financial situation.

In this article, we’ll explore how the FHSA and RRSP Home Buyers’ Plan work, their pros and cons, and which might be better suited to help you save for your first home in Canada.

What Is the First Home Savings Account (FHSA)?

The FHSA is a relatively new savings account introduced by the Canadian government, specifically designed to help first-time homebuyers save for their home purchase. It combines the tax benefits of both a TFSA (Tax-Free Savings Account) and an RRSP.

Key Features of FHSA:

• Contribution limit: Up to $8,000 per year, with a lifetime contribution limit of $40,000.

• Tax treatment: Contributions are tax-deductible (like RRSP contributions), and withdrawals used to buy a first home are tax-free (like TFSA withdrawals).

• Eligibility: Must be a Canadian resident aged 18 or older and a first-time homebuyer (no ownership in the last four years).

• Withdrawal: Funds can be withdrawn tax-free for a qualifying first home purchase.

• Account lifespan: Must be used within 15 years of opening or by the end of the year the account holder turns 71.

• Investment options: Similar to RRSPs and TFSAs, you can invest in stocks, bonds, ETFs, mutual funds, etc.

What Is the RRSP Home Buyers’ Plan (HBP)?

The RRSP Home Buyers’ Plan has been available for years as a way for first-time homebuyers to withdraw from their RRSPs to purchase or build a qualifying home.

Key Features of RRSP Home Buyers’ Plan:

• Withdrawal limit: Up to $35,000 per person ($70,000 for couples).

• Tax treatment: Contributions to RRSPs are tax-deductible. Withdrawals under the HBP are tax-free but must be repaid over 15 years.

• Eligibility: Must be a first-time homebuyer, defined as not owning a home in the last four years.

• Repayment: Withdrawn amounts must be repaid to your RRSP within 15 years. Missing repayments results in the amount being added to your taxable income.

• Timing: The RRSP contributions must be in the account for at least 90 days before withdrawal.

• Investment options: RRSPs also allow a wide range of investment options.

FHSA vs RRSP HBP: Side-by-Side Comparison

Advantages of the FHSA for First-Time Homebuyers

1. Dual Tax Advantage: The FHSA offers the rare combination of tax-deductible contributions and tax-free withdrawals for a qualifying home purchase. This means you reduce your taxable income when contributing and don’t pay tax when withdrawing for your home.

2. No Repayment Requirement: Unlike the RRSP HBP, withdrawals from the FHSA don’t have to be repaid. This flexibility is ideal if your plans change or if you cannot repay funds as required by the HBP.

3. Dedicated Account: The FHSA is exclusively for homebuyers, which can help keep your savings goal-focused and separate from retirement savings.

4. Lifelong Limit: While there is a 15-year lifespan, it provides a decent window to save. If unused, the FHSA can be converted to an RRSP or RRIF without tax consequences.

Advantages of the RRSP Home Buyers’ Plan

1. Higher Withdrawal Amount: The HBP allows you to withdraw up to $35,000 per person, which can be up to $70,000 for a couple—more than the FHSA lifetime limit of $40,000.

2. Access to Existing Savings: If you already have a sizeable RRSP, you can use the HBP to tap into those funds, potentially jump-starting your down payment faster.

3. Tax-Deferred Growth: Since RRSPs are long-standing vehicles, your investments may already be growing, and withdrawing under the HBP lets you access this accumulated capital.

Potential Drawbacks of Each

FHSA Drawbacks:

• New Account, New Limits: The FHSA is new and may not be available in all financial institutions yet. Also, the lifetime contribution limit is $40,000, which might not be sufficient in some housing markets.

• Limited Time to Use Funds: The 15-year limit means you need to use your savings for a home relatively quickly.

RRSP HBP Drawbacks:

• Repayment Requirement: You must repay withdrawn amounts within 15 years, or face taxation, which adds financial pressure.

• Reduced Retirement Savings: Withdrawing from RRSPs means your retirement nest egg shrinks, potentially jeopardizing long-term goals.

• Waiting Period: RRSP contributions must be in the account for 90 days before you can withdraw under the HBP, which might slow down immediate access to funds.

Which Is Better for First-Time Homebuyers?

There’s no one-size-fits-all answer. The best option depends on your financial situation, timeline, and goals.

Choose FHSA if:

• You’re just starting to save and want a dedicated, tax-efficient account for your home purchase.

• You prefer not to mix home savings with your retirement funds.

• You want tax deductions on contributions and tax-free withdrawals without repayment obligations.

• You want flexibility and a savings vehicle designed solely for first-time homebuyers.

Choose RRSP HBP if:

• You already have substantial RRSP savings and want to leverage them for your down payment.

• You need a larger amount upfront ($35,000+) and are comfortable with repaying it over time.

• You are confident in your ability to make repayments and maintain your retirement savings plan.

• You want immediate access to funds that are already invested.

Can You Use Both?

Yes! The FHSA and RRSP HBP can be used together, meaning you can maximize your savings by contributing to an FHSA while also withdrawing funds from your RRSP under the HBP.

For example, a couple could potentially withdraw $70,000 from their RRSPs under the HBP and also have up to $40,000 saved tax-free in an FHSA account. This combined strategy can substantially boost your down payment potential.

Additional Tips for First-Time Homebuyers

• Start Saving Early: The more time you have to save, the better your chances of building a solid down payment.

• Understand Your Eligibility: Check whether you qualify as a first-time homebuyer under the specific rules of FHSA and HBP.

• Consider Other Government Programs: The Canada Mortgage and Housing Corporation (CMHC) offers mortgage loan insurance and other programs to assist first-time buyers.

• Consult a Financial Advisor: Personal circumstances vary, so getting professional advice tailored to your financial picture can be invaluable.

Conclusion

Both the FHSA and RRSP Home Buyers’ Plan are powerful tools designed to help Canadians buy their first home. The FHSA offers a fresh, dedicated, and flexible savings vehicle with great tax benefits and no repayment obligation, while the RRSP HBP allows access to larger amounts of existing savings but requires repayments to avoid tax consequences.

Ultimately, the choice depends on your current savings, comfort with repayments, and long-term financial goals. Using both strategies in tandem could also be a smart way to maximize your home buying budget.