A tax deduction is available on contributions, as with an RRSP, and you get the TFSA’s tax-free withdrawals when using the account to buy a home. Investment gains earned in an FHSA are tax-sheltered, as with RRSPs and TFSAs.sorbetto/iStockPhoto / Getty Images
The first home savings account is coming up to its six-month anniversary with a bit of a scarcity problem.
The FHSA is a must-have for anyone saving for a home, and aspiring owners need all the help they can get in building down payments. But the rollout of FHSAs by banks and financial companies has been slow. Quite a few still show messages on their websites about introducing FHSAs this fall or in 2024.
If you’re interested in an FHSA, there are at least four smart options right now, and we’ll dig into them in a minute. But first, let’s acknowledge a sense of urgency about starting FHSAs based on current investing conditions.
The stock markets have delivered solid gains for the year to date, bonds are recovering from last year’s mauling and virtually risk-free returns of 4.5 per cent to 5.3 per cent are available from a variety of investing products that can be held in FHSAs.
You don’t have to wait until your bank or broker gets around to offering FHSAs. Strike now, and get your share of what financial markets are offering.
Here’s a quick version of an FHSA primer I wrote when these accounts were introduced at the beginning of April: They’re available to people aged 18 and up who did not own a home in the part of the calendar year before an account is opened or the previous four years. Annual and lifetime contribution limits are $8,000 and $40,000, respectively, and they combine the best of tax-free savings accounts and registered retirement savings plans.
A tax deduction is available on contributions, as with an RRSP, and you get the TFSA’s tax-free withdrawals when using the account to buy a home. Investment gains earned in an FHSA are tax-sheltered, as with RRSPs and TFSAs.
Now for a look at four smart FHSA options you can put to work immediately:
EQ Bank
Look to EQ if you have a tight or near-term timeline for home buying, say within one to five years. EQ’s FHSA savings account paid 3 per cent as of mid-September, which is better than the bank’s regular 2.5 per cent savings rate. Deposits are covered by Canada Deposit Insurance Corp., so there’s no risk of losing money.
EQ also offers guaranteed investment certificates at competitive rates for FHSAs, but mind the risk of suddenly finding the house you want at a time when your FHSA savings are locked into a GIC. EQ’s GICs for FHSAs are offered for terms of three, six, nine, 12, 15, 24 and 27 months, and even longer, with rates as high as 5.75 per cent in mid-September.
The rate on the EQ FHSA savings account sounds lame compared with potential gains in the stock market, but it’s a fair trade-off for the security of knowing your home down payment money cannot lose value, and your interest is protected.
Exposure to stocks makes sense for an FHSA when your timeline goes out five years and beyond. The longer you stay invested, the better the chances that stock market ups and downs will net out with a gain that beats safe money options such as savings accounts.
Questrade
First, kudos to Questrade for being the leader in introducing FHSAs. With a minimum of $250, you can take advantage of Questrade’s offer of zero commissions for buying exchange-traded funds.
The usual commission of $4.95 at minimum applies to selling stocks or ETFs, but that’s a minor consideration for FHSAs, because you’ll mainly be buying to build the value of your account.
ETFs are a great low-cost way to build a portfolio for virtually all goals. Funds to consider for an FHSA with a time horizon of five years or longer: asset allocation funds, which combine all the components of a fully diversified portfolio into one low, all-inclusive fee. Various risk levels are available, from conservative to all stocks.
For shorter time horizons, consider high interest savings account ETFs. They hold money in bank deposits that deliver a return of about 5.3 per cent after fees. Returns on these ETFs track the Bank of Canada’s overnight rate, which is expected to start edging lower next year.
RBC Direct Investing
RBC DI is a traditional online broker with commissions of $9.95 to buy and sell stocks and ETFs. But you can build a low-risk FHSA at RBC with no commission costs using the RBC Investment Savings Account, which offered a return in mid-September of 4.55 per cent. As the name suggests, investment savings accounts are savings accounts packaged for investors. You order them like a mutual fund – the code for RBC’s offering is RBF2010. As with HISA ETFs, returns on investment savings accounts will follow the Bank of Canada’s overnight rate lower at some point.
One more fee note: For FHSAs, RBC DI waives its usual $25-per-quarter account maintenance fee for clients with less than $15,000 in assets combined in all their accounts at the firm.
Wealthsimple
A self-directed Wealthsimple FHSA is ideal for the type of person who plans to add money into their account on a regular basis and wants to put it all to work immediately with minimal costs.
Stocks and ETFs can be traded with no commissions, and fractional purchases are available. You can also use your dividends to buy fractional shares. The usual dividend reinvestment plan requires you to have enough dividend income to buy full shares.
Pick an asset allocation or HISA ETF – or both – and add money to your account as often as you can. Wealthsimple also offers managed FHSAs through its robo-adviser services. The cost is reasonable at 0.5 per cent, which layers on top of the minimal fees charged by the ETFs used in these portfolios.
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Rob Carrick