A new tool to help with first-time ownership

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This article was published 11/06/2022 (1195 days ago), so information in it may no longer be current.

Would-be first-time homebuyers will soon have a new tool in their savings kit for a down payment.

Amid the federal budget announced earlier this spring was the big reveal of the Tax-Free First Home Savings Account (FHSA) aimed specifically, as the name suggests, for those seeking to save for their first home.

While it won’t come into effect until 2023, it’s a notable development bearing examination as home prices set record highs, driven by unprecedented demand.

“We know, for many young adults, homeownership continues to be a priority,” says Andrea Metrick, senior director of home equity financing at RBC in Toronto, pointing to a recent housing survey by the bank.

In Manitoba, about one in five young people surveyed indicated planning to buy a home in the next two years, down from about one in four last year. That drop may be a result of a higher barrier to entry with the benchmark price of a home in Canada hitting more than $880,000 this spring, led by markets like Toronto where the average cost exceeds $1.3 million, based on Canadian Realtors Association data from April.

By comparison, Winnipeg is much less pricey at about $351,000 for an average home.

Still, first-time buyers would have to save a minimum down payment — five per cent of the home’s value — of nearly $18,000, no small feat.

“For many young adults, affordability remains a big stressor,” Metrick notes, adding 31 per cent of this demographic indicated living at home longer to save for a home.

While individuals already have the Home Buyer’s Plan, allowing them to borrow up to $35,000 from their RRSP, to purchase a home, the new program offers “the advantage of not having to pay the amount back withdrawn,” says Jason Evans, fee-for-service financial planner at D. Robinson and Associates Inc. in Winnipeg.

Additionally, the maximum lifetime contribution to the new FHSA is $40,000 with the potential to grow larger over time once invested.

Yet the FHSA is shares commonalities with the RRSP and TFSA (Tax-free Savings Account). Individuals can save a maximum of $8,000 annually in a FHSA, receiving a tax deduction on contributions — like an RRSP. And the money grows and can be withdrawn tax-free — like a TFSA — as long as it’s for the purchase of a home.

Yet given we already have the TFSA and Home Buyers’ plan for the RRSP, “we frankly don’t need this new account,” argues Rob McLister, editor of MortgageLogic.news.

What’s more, it’s unlikely most young adults can save even $8,000 a year, he adds, noting few eligible Canadians withdraw the maximum from their RRSP to buy a home under the long-running Home Buyers’ Plan, based on Canada Revenue Agency data.

“To me it’s voter candy with the government trying to make it look like it’s doing something about affordability,” he says about the new account. “But in reality, it will barely move the needle.”

In fact, saving is not the key problem; it’s prices running away from first-time buyers, especially the nation’s largest cities.

And even if prices cool, as they have in Toronto, mortgage interest rates are rising, further hurting affordability.

The obvious solution is more supply, easier said than done in an inflationary environment for labour and materials, he says.

If the FHSA has any differentiating benefit, it’s that it “encourages people to wait to buy a home, which would be a positive if prices fall,” McLister says.

That’s a likely scenario after a years-long housing bubble, he adds.

“We’re going to see a correction in prices; it’s only a question of magnitude.” McLister says he would not be “surprised” if prices drop as much as 20 per cent, depending on the city. Yet even if they do, prices often rebound quickly. The last time home prices fell and stayed down for a prolonged period was in the late 1980s and 1990s, he further notes.

Market conditions aside, the new FHSA could prove useful for young adults with a medium-term goal to purchase a home, says certified financial planner Jackie Porter with Carte Financial Group in Mississauga.

“When you can put a container around something that you’re saving for, like with this new plan, it’s easier to get and stay motivated.”

Saving has long been a challenge for young adults. To make real inroads, Porter says they need a budget that they can stick to — all the more difficult recently.

“People are dealing with the rising cost of things, just trying to keep money in their pocket right now, let alone for the future,” Porter says.

Those young adults who can find money to save and have time to spare can certainly use the FHSA to their advantage, given the account can remain active 15 years (and if they do not buy a home by then, it can transfer to an RRSP).

Even older Canadians—who rented for most of their life — could use it to save for a first home as the government removed in the budget the maximum age of 40 previously part of the Liberal Party election platform.

Other older Canadians may see another use for the FHSA: helping their adult children save.

“I suspect that this will be something that happens a lot,” Evans says.

“Just give the kids the money, who can then also get the tax deduction.”

Even then, Evans is sceptical given many parents are already helping their children with a down payment.

“It’s kind of a band-aid solution for a larger home affordability problem.”