The FHSA is an investing account introduced by the federal government in 2022 that combines the benefits of a tax-free savings account (all your capital gains within the account are exempt from capital gains) and the registered retirement savings plan (your contributions into the account are income-tax deductible).srpphoto/iStockPhoto / Getty Images
With the Bank of Canada beginning an easing cycle that is expected to consistently deliver dropping interest rates, the days of high returns with guaranteed investment certificates, or GICs, and other low-risk investing products are coming to an end. But they’re still a strong option for aspiring homeowners who are taking advantage of the first home savings account, or FHSA.
Rates for GICs – an investment product that provides a guaranteed return with no risk – soared above 5 per cent for one-year terms when interest rates peaked. Some online banks were offering one-year rates as high as 5.6 per cent in 2023. Today, returns have dropped to around 4.2 per cent at Tangerine and EQ Bank.
But as the next few months are poised to be an opportune time for prospective homebuyers, investment advisers say they’re one category of investors that could greatly benefit by using a GIC in their FHSA. There are two reasons: They offer zero downside risk on your precious down payment that could be needed within short notice, and they offer a safe way to benefit from the FHSA’s powerful tax-sheltering benefits.
The FHSA is an investing account introduced by the federal government in 2022 that combines the benefits of a tax-free savings account (all your capital gains within the account are exempt from capital gains) and the registered retirement savings plan (your contributions into the account are income-tax deductible).
The benefits can’t be underestimated. According to the government’s FHSA tax savings calculator, an Ontario resident making $80,000 that deposits the yearly contribution limit of $8,000 would save an estimated $1,604 to $2,372 in taxes that year. That’s a nearly 30-per-cent return on your deposit before even factoring in your gains from investing. No investment product could offer that kind of value with zero risk.
Aaron Hector, a certified financial planner with CWB Wealth Management, says you have two obvious choices for investment products for your down payment if you’re actively shopping for a home in the near term. The first is a GIC, and the other is a high-interest savings account ETF, which essentially mimics a high interest savings account but in a product that you can purchase easily like any stock.
Mr. Hector prefers HISA ETFs because they’re more flexible. They generally produce a return once a month, and you can sell at any time to get back your money. GICs, on the other hand, will have a penalty if you withdraw before your term ends. (Usually, you’ll get your initial investment back, just without any growth.)
“I’d prefer the HISA ETFs over GICs because with most GICs, to get better rates you have to lock in for a period of time, and the shorter your lock-in time, the less your return is going to be,” Mr. Hector said.
“But even with a six-month GIC, what happens if you find a home one or two months out?”
The downside to HISA ETFs is that they have slightly lower returns than GICs, and the monthly rate you receive will drop when interest rates drop, while GICs lock in your rate over their term.
It’s one of the reasons why Jason Heath, managing partner at Objective Financial Partners, says GICs are great for people with some confidence that they have a longer timeline before they can actually buy a home.
“You need to balance locking in a high rate with the time horizon for needing the funds,” Mr. Heath said.
