The target age to buy a home is around age 30, an advisor says. If the client is a diligent saver or has some help from parents and starts early, they could have 10 to 12 years for that $40,000 in an FHSA to grow.Sundaemorning/iStockPhoto / Getty Images
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Canadians who dream of buying a home can now use the new first home savings account (FHSA) as a tax-free investment vehicle to save for their first residence, but they need to keep their time horizon in focus as they choose the best investments to reach homeownership goals.
Investors can choose more aggressive investments if they have a time horizon of 10 years or more before they plan to buy a home, but should gradually shift to more conservative investments once they’re three to five years from making that big purchase, says Sadiq Adatia, chief investment officer at BMO Global Asset Management.
Another consideration for how much risk to take in an FHSA is whether it will be the main source of savings for a home purchase or if there are other sources, such as the Home Buyers’ Plan (HBP), which lets investors withdraw up to $35,000 from a registered retirement savings plan (RRSP) or additional investment or savings accounts or gifts from family, he adds.
“Assuming you have these funds earmarked for the purchase, if [your time horizon is] zero to five years, you shouldn’t take on too much equity risk because you could have multiple years of equity declines, or a gap situation like we saw in 2022,” Mr. Adatia explains.
Instead, with that time horizon, investors should focus on bonds, especially now that it appears the Bank of Canada is pausing on interest rate hikes and may eventually cut them, “which is conducive to higher returns in the bond market.”
The FHSA, created by the federal government in 2022 and open for investment as of April 1, 2023, allows Canadian residents 18 years or older to contribute up to $8,000 a year to a lifetime maximum of $40,000, toward buying a first home. There’s a tax deduction for the contributions and the withdrawals are tax-free. The program can also be combined with the HBP, which is different from the FHSA as those funds need to be repaid to an RRSP over time.
Considering balanced funds
Jennifer Toszer, senior wealth advisor and portfolio manager with Tozser Wealth Management at National Bank Financial Wealth Management in Calgary, says if a client has less than a year before buying a home, the funds should be in safe money market funds, and that shift can start between one and five years from when they hope to make a purchase.
But if they have five years or more, they should look at a high-quality North American equity or balanced fund, depending on their risk tolerance. A single position in one fund is adequate until it reaches $20,000 in market value. Then, they can consider a second position, she notes.
The target age to buy a home is around age 30, she notes. If the client is a diligent saver or has some help from parents and starts early, they could have 10 to 12 years for that $40,000 to grow.
“You’re going to have some kind of equity exposure, and I’m going to tell you, you want to be in mutual funds,” she explains. “The reason you want to be in mutual funds versus a ‘blue-chip stock’ is that $40,000, which is the maximum amount [you can contribute], is not enough to diversify [in individual stocks].”
Future homebuyers know they’re going to be spending all that money within 10 to 12 years, so it’s okay to have a long-term investment, which would be a Canadian or U.S. equity fund, a North American equity fund, or a North American dividend fund, she says.
Ms. Toszer recommends investors stay away from index exchange-traded funds (ETFs) for FHSAs because most indexes are not well diversified and have a few big stocks that are the main drivers. For example, the S&P 500 is led by tech firms including Apple Inc. AAPL-Q and Microsoft Corp. MSFT-Q.
In addition, the index can be volatile, she says. The S&P 500 rose 27 per cent in 2021, only to fall 20 per cent in 2022 and gained 24 per cent in 2023.
Ms. Toszer says if investors are 18 years of age, it’s better to put funds into a tax-free savings account (TFSA) first instead of the FHSA, as they likely don’t have enough income to benefit from the tax deduction they could receive. Once they start working, then they can shift funds from the TFSA to a FHSA, which will be a more tax-efficient strategy, she adds.
When to take more or less risk
Mr. Adatia says if clients are looking at a time horizon between five and 10 years, then they need a more conservative portfolio with a heavier weighting in bonds, but should also include equities, “so, they’re not adding a significant amount of risk, per se.”
If investors have 10 years or more before they plan to buy a home, then they can go more aggressive with their risk profile, he notes.
“You [should] look at … a balanced portfolio, which is more equities than bonds, but still something like a 60/40 split, which is great if you have that longer horizon that can withstand a couple of bumps along the way,” he explains. “But [it must be] well diversified so that no one asset class, region or sector impacts you significantly.”
This strategy allows investors to “participate as markets go up, which is traditionally what happens – not every single year – but over a long period of time,” he says.
An actively managed balanced mutual fund or ETF will be managed professionally and diversified across sectors, regions and asset classes, he adds.
If clients have a time horizon of more than 10 years, then they can look at a portfolio that holds more equities, perhaps an 80/20 split.
“To have a negative return over a 20-year period is quite unlikely and, therefore, you do want to take on the higher risk to drive higher returns over that period of time,” he says.
Target-date funds, which aim to have funds withdrawn in a certain year or over a particular timeline, such as 15 years, are a useful tool, Mr. Adatia says. Another option is target-risk portfolios, which are targeted to a specific risk profile such as conservative, balanced or growth.
“That still can do the job” as an investor’s risk profile over a five-year time horizon won’t change much, he says.
As the time narrows to when an investor plans to purchase a home, they can then decrease the risk in the portfolio so that five years out the portfolio is much more conservative, he advises, depending on their personal risk profile and situation.
Meanwhile, a portfolio and risk profile should be assessed every few years or if there’s a major life situation, such as getting married, having a child, losing a job or getting a promotion.
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