A dubious distinction is up for grabs in the digital investing world: Who will be the last to introduce a first home savings account to clients.
Among the heavyweight contenders are TD Direct Investing, Canada’s biggest online broker and, according to my own ranking, its best. Also BMO InvestorLine, another upper-tier broker.
First home savings accounts (FHSAs) are an ideal way to save for the down payment on a first home, and there are few good arguments for not having one. But the rollout of FHSAs since they became available in April has been laboriously slow. If your investment dealer doesn’t offer them yet, you may not want to wait.
Open an account before Dec. 31 and you get $8,000 in contribution room that can be carried forward to 2024 if unused, said Aravind Sithamparapillai, associate with Ironwood Wealth Management Group. If you wait until 2024, you lose out on the $8,000 in room for this year because contribution room for an FHSA starts to build only when you open an account.
“If people are modestly serious about buying a home, then they should probably accelerate their timeline and open an FHSA this year,” Mr. Sithamparapillai said.
The weakening state of the real estate market in some cities also argues for quick action on FHSAs. If you put $16,000 into an FHSA between this year and next, you have a reasonable start on a down payment.
As with registered retirement savings plans, contributions to FHSAs generate a tax deduction. Depending on their province, someone with taxable income of $75,000 would save between $2,256 and $2,976 on taxes with an $8,000 contribution. That money can be used as well for a down payment.
As with tax-free savings accounts, there’s no tax on your contributions or investment gains from an FHSA. So any interest or dividend income, or capital gains, are yours to keep in full.
In the digital investing universe, the independent digital broker Questrade was the first to offer FHSAs, and RBC Direct Investing was in the next wave. Other brokers that mention FHSAs on their public websites include CIBC Investor’s Edge, National Bank Direct Brokerage, Qtrade Direct Investing, Scotia iTrade and Wealthsimple.
Both Questrade and Royal Bank of Canada said this week they have opened tens of thousands of FHSAs. RBC said 19 per cent of accounts were set up by people under the age of 25, while those aged 25 to 34 account for 55 per cent of accounts.
Questrade said most clients are taking advantage of the full $8,000 annual contribution room. There’s a lifetime $40,000 maximum contribution for FHSAs, which can remain open for a maximum of 15 years.
While they lack FHSAs for self-directed online investors, both Bank of Montreal and Toronto-Dominion Bank offer these accounts through their branch network. Expect a choice of the bank’s mutual funds or guaranteed investment certificates if you go this route.
A reader recently reported that his son went into a bank branch to open an FHSA and ended up with a balanced mutual fund that has a management expense ratio of 1.91 per cent. In a self-directed FHSA brokerage account, you could buy a comparable exchange-traded fund with an MER of 0.2 per cent. It’s basic investing math that lower costs feed higher returns.
Balanced funds and traditional portfolios of stocks and bonds are great for home buying timeframes of at least five to seven years. If there’s a chance you’ll buy in the next few years, consider less risky options:
- High-interest savings account ETFs: Assets held in bank savings accounts and interest rates expected to be a touch below 5 per cent in the months to come; returns will change in lockstep with the Bank of Canada’s overnight rate, which is expected to start falling in the first half of next year.
- Investment savings accounts: Savings accounts that trade like mutual funds and, unlike HISA ETFs, typically offer deposit insurance; returns in the 4.55-per-cent to 4.75-per-cent range for the most part.
- T-bill and money market ETFs: After-fee yields are in the high 4-per-cent range now but will edge lower as rates decline in the months to come.
- Cashable guaranteed investment certificates: Not all digital brokers offer these, and the rates are well below other options.
If you open an FHSA this year, mind the catch-up rules for unused contribution room. Unlike tax-free savings accounts, where you can exploit your unused contribution room at any time, FHSAs let you catch up on just one missed year’s room.
Someone who opened an FHSA in 2023 and then waited until 2025 to contribute would be able to add a maximum of $16,000 to the account. That’s $8,000 for 2025 and $8,000 for one of the two missed years.
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Rob Carrick