The Smart Way to Save for a Down Payment

There are plenty of savings and investment accounts you can use to save for a down payment on a home. Depending on the timeline, you could consider using a High Interest Savings Account (HISA), the First Home Savings Account (FHSA), the Tax-Free Savings Account (TFSA) and the RRSP Home Buyer’s Plan.

So, which accounts are the best choice for saving for a down payment? While they all have their pros and cons, some are definitely better than others. Here's a review of the FHSA, HISA, TFSA and RRSP, including the key features so that you can make an informed choice.

Which Account is Best for a Down Payment?

FHSA

The FHSA was created specifically to save for a down payment, and it is the first account people should use.  The FHSA offers a tax deduction (like the RRSP) on contributions and allows the holder to withdraw the cash tax-free (like the TFSA).  Both benefits make it better than both the RRSP and the TFSA.  

The most you can save in a FHSA is $40,000 plus growth. That said, if there are two people buying a home together, they can each contribute $40,000 from their respective accounts for a total of $80,000. While likely not enough for most properties in major cities, it's a great start. 

Even if you plan to buy in a year or two and won't be able to use up all your contribution room, it's still worthwhile to open the FHSA, just for the tax deduction. 

HISA

A HISA won’t earn much interest and isn’t tax advantaged, but it’s a no risk way to save. Being able to save cash while still living the lifestyle you want (at least for now) confirms that you can operate on the cash flow you have now. 

In fact, no one should consider buying until they have a good portion of their down payment and other expenses, like closing costs, moving costs, legal fees and other new home expenses like furniture and paint, in cash. Don't forget to have a reserve for an emergency fund too. Homeownership comes with a never-ending supply of surprise expenses.

Note the CDIC only insures $100,000 per account so consider using more than one account once you get to $100,000. 

TFSA

The TFSA can hold investments that grow tax-free, and money can be withdrawn for any reason. While the TFSA is best used for long-term investing like retirement, there are exceptions. A person who is young with lots of time to save for retirement or a person with an excellent pension and/or significant RRSP savings, would likely need to use their TFSA for additional down payment. In this case, the type of investments held in the TFSA would need to match their timeline.  

The most you can save in a TFSA is your personal contribution limit. For anyone who was 18 or older in 2009, that amount is $95,000 as of 2024. To find your contribution limit, sign in to your CRA My Account. 

RRSP

The RRSP was created to help people save for retirement.  Before the FHSA (2023) and TFSA (2009) were introduced, this account was the only one people could use to help them afford a down payment.  

The RRSP Home Buyer’s Plan (HBP) allows the holder to borrow from themselves, interest-free, up to $60,000 (it was $35,000 prior to April 2024) from their RRSP account to use toward a down payment.  

The caveat here is that the funds need to be paid back over a 15-year period, starting 2 years from the withdrawal date. This means that in addition to mortgage payments, property taxes and other expenses related to homeownership, not to mention saving for retirement and short-term goals, a person needs enough cash flow to repay their loan as well. This is often a stretch for most people, which is why the FHSA, HISA and TFSA are better options. 

Which Account Should Your Down Payment Come From? 

After you’ve saved for a down payment, consider withdrawing the funds from these accounts, in this order: 

1. FHSA - tax-deduction and tax-free withdrawals 
2. HISA -  cash in this account is risk-free and easy to access
3. TFSA  - tax-free withdrawals 
4. RRSP Home Buyer’s Plan - interest-free loan from yourself

Of course everyone's circumstances are different and the order that these accounts are best used vary. It's always best to check in with a financial advisor to weigh the pros and cons.

Extra tip: Contribute the tax rebates from FHSA and RRSP contributions each year to your HISA.  This cash can help with closing costs and move-in expenses.

Do a Stress Test Before Buying a Home 

Being able to afford a home goes well beyond saving up for a down payment.  Before you buy, you also need to consider whether you can afford to operate the home on your budget, while also still maintaining the lifestyle you desire.

Things to consider: 

• If interest rates doubled, could you afford to make the payments? (This exact thing happened starting in 2022). Run the calculations at different rates.
• Many people forget to add all the added costs of homeownership when calculating affordability. In addition to mortgage payments you'll need to cover property tax, utilities, home maintenance and repairs, and repayment of your RRSP Home Buyer’s Plan, if you used it.
• Can you afford all the above and still save for retirement and other goals like a vacation? If you can't, you'll be leaving yourself incredibly vulnerable to debt.
• If you lost your job, could you afford to cover all the above expenses for 3 to 6 months? If not, make sure you have an emergency fund saved first. 

If any of the above scenarios puts a strain on your budget, then you should reconsider whether you can afford to buy a home just yet.  A financial advisor can help you run these numbers in a financial plan, making it crystal clear whether you can afford to buy or not.