Dale Jackson

Personal Finance Columnist, Payback Time

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Two of Canada’s major banks are reporting strong demand for the just-launched First Home Savings Account (FHSA) from young Canadians saving for a down payment.

It’s no surprise considering the FHSA has the combined tax perks of a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA), but the real challenge is how to invest for a potentially short and shifting time horizon.

Like an RRSP and TFSA, contributions in a FHSA can be invested in just about anything. Investments in a FHSA, however, must be ready to liquidate quickly when that magic day comes and the account holder makes an offer on a home. That could come any time between immediately to a maximum of 15 year (when it can be transferred to an RRSP). 

Fixed maturities on bonds and guaranteed investment certificates (GICs), or equities in the depths of a market lull, could pose a problem.

TAX PERKS FROM A FHSA ARE A GOOD START

First, the risk-free return from tax savings make a FHSA a good investment even if it stays in a high interest savings account - especially if those tax savings are reinvested.

Contributions are tax deductible (like a RRSP) and gains on the investments are never taxed (like a TFSA) as long as the funds are used for the purchase of a first home. Like RRSPs, the higher your income, the bigger the tax savings. Like TFSAs, the tax savings depend on how well the investments do.

FHSAs have a lifetime limit of $40,000 and an annual contribution limit of $8,000.

WHAT THE INVESTMENT ADVISORS ARE ADVISING

RBC and National Bank of Canada are the first big banks to offer FHSAs, along with Questrade and Fidelity Investments Canada.

RBC is offering FHSAs on its Direct Investing platform for do-it-yourself investors, which includes GICs, high interest savings accounts, mutual funds, exchange traded funds (ETFs), stocks and bonds.

Canada’s largest bank also offers the same range of investments on its RBC InvestEase platform, where advisors offer flexible portfolios of investments tailored to individual clients based on their tolerance for risk and timelines.

RBC says the advisor platform is designed for investors who have a time horizon of at least two years. Advisors will keep an eye on the investments and rebalance portfolios as needed to keep clients on track.

National Bank of Canada offers the same range of personally tailored investments through professional advisors.

DON’T LET FEES DRAIN YOUR DOWN PAYMENT

There should be no cost to open a First Home Savings Account but banks are in the business of making money and with registered plans like the FHSA, RRSP and TFSA, the bulk of that money is made from fees on the investments inside them.

Those fees can wind up diluting investment returns and even tax savings.

It stands to reason that the do-it-yourself accounts have the lowest fees but the investments themselves can be costly. Annual fees on mutual funds often exceed two per cent of the total amount invested, which would be a drain on the meagre returns from such short-term investments.

There should be no direct fees on high-interest savings accounts or GICs, which currently pay annual returns of about five per cent.

The financial services industry is always coming up with new and confusing ways to generate fees, so be sure to ask.