FHSA: Which investment options should you choose?

schedule

5 min.

ios_shareShare

The ideal asset mix for your first home savings account (FHSA) mainly depends on your tolerance for risk and the length of time you have until you buy your home. Here’s why, using real-life scenarios.

Understanding FHSA investment options

The FHSA has become a must-have savings plan for anyone planning to buy their first home in Canada.

As with other registered savings plans, there are a variety of investment options to choose from, each with their own impact on your FHSA returns. Some investments carry more risk but have the potential to earn higher returns. Others are safer, but the returns they generate are more modest and more stable.

Here’s an overview of FHSA investment options:

Investment funds: These funds offer a multitude of possibilities. Depending on your preferences and your investor profile, you can choose equity, bond or income funds, and you can even focus on specific geographical regions, management styles and risk levels.
Guaranteed interest funds (GIFs): Similar to guaranteed investment certificates (GICs) from the banks, GIFs provide a fixed and guaranteed rate of return over a pre-set period of time, up to 10 years. They can also be used to balance a portfolio’s level of risk.
High interest savings account: Like GIFs, this investment option guarantees the capital you invest and offers higher returns than a savings account at a bank. However, the rate of return can vary over time.

Your advisor can help you choose the investments that are best suited to your needs and to your time horizon until you buy your first home. For example:

If you have some years before you plan to use your FHSA, you can afford to choose riskier investments in the early years to earn potentially higher returns because you have a longer time horizon.
If you’re planning to buy a home sooner, you might opt for a more balanced and safer strategy to reduce your risk.

Other factors may also come into play, such as your risk tolerance and your personal goals. That’s why it’s important to speak with an advisor, who can analyze your situation and work with you to determine your investor profile.

Here are two scenarios that can deepen your discussions with your advisor.

Emily, age 27, plans to buy a home in the next five years

Emily has finished school and would like to buy her first home in about five years’ time.

She has had a full-time job since she graduated, so she has been able to save a sizable sum of money toward the purchase of a home. Since she doesn’t want to buy right away, she decides to transfer money from her tax-free savings account (TFSA) to her FHSA to take advantage of the tax deductions between now and when she purchases her home.

She can use the savings in her TFSA to make the maximum annual contribution to her FHSA, which is $8,000 per year. At the end of each year in which she withdraws money from her TFSA, she gets back the same amount of contribution room.
By continuing to save her money, she estimates she’ll be able to make the maximum lifetime TFSA contribution of $40,000 in five years.
Because she plans to buy in the next five years and is looking for stable returns, Emily chooses a balanced diversification strategy with the help of her advisor. She invests in a fund made up of a selection of stocks and bonds from various governments and companies around the world.
In year 5, as she gets closer to her goal and will need to withdraw her money, she makes sure part of her investment is guaranteed by investing $10,000 in a high-interest savings account.

Year	Contribution	Rate of return	Estimated balance
1	$8,000	5.5%	$8,440.00
2	$8,000	6.3%	$17,475.72
3	$8,000	4.7%	$26,673.08
4	$8,000	7.2%	$37,169.54
5	$8,000	4.1%	$47,021.49

With a total contribution of $40,000 over 5 years, Emily achieved a time-weighted return of 31.03%. She therefore earned $7,021.49 on her savings and can withdraw it tax-free toward the purchase of her house.

Tip

Emily reinvested part of the tax refund she received from her FHSA contribution deductions. By doing this, she was able to accelerate the growth of her savings.

Alex, 21, plans to buy a home in ten or more years

Alex is 21 years old and is still in school. He would like to buy a home in about ten years, or a bit later.

He works part-time, but plans to increase his contributions once he has a full-time job.
Since he has the luxury of time, he and his advisor decide on a somewhat bolder approach, allocating more of his portfolio to equity funds to maximize his potential returns.
He plans to reduce the risk level of his FHSA two or three years before withdrawing the funds to avoid potential losses. He will do this by increasing his holdings in bonds and investing part of his portfolio in a guaranteed interest fund.

Year	Contribution	Rate of return	Estimated balance
1	$1,000	7.4%	$1,074.00
2	$2,000	11.5%	$3,427.51
3	$2,000	-4.2%	$5,199.55
4	$3,000	-2.4%	$8,022.77
5	$4,000	6.3%	$12,758.94
6	$5,000	12,7 %	$20,014.32
7	$6,000	12.7%	$28,303.59
8	$6,000	5.6%	$36,224.59
9	$6,000	4.7%	$44,209.14
10	$5,000	4.4%	$51,374.34

Notice that Alex was able to increase his contributions as planned because his income went up, and he was even able to reach the maximum lifetime contribution of $40,000. He enjoyed a time-weighted return of 68.46% over 10 years and made a tax-free profit of $11,374.34 toward the purchase of his first home.

Tip

Since Alex didn’t pay much tax when he was a student, he carried forward his deductions to future years. That allowed him to reduce his taxable income when his salary increased. Having had a child in the meantime, this income reduction even allowed Alex to qualify for higher family benefits.