First Home Savings Account called ‘voter candy for millennials’ by mortgage insider

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Housing affordability has been a recurring theme on the campaign trail this election, but when it comes to the proposals that have been put forward to address it, one has attracted the most debate.

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Last month, the Liberal Party proposed a new tax-free First Home Savings Account (FHSA) that would allow those under 40 to save up to $40,000 and withdraw it tax-free with no obligation to repay the funds.

The accounts meld together benefits of both a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA), but despite the extra $40,000 of sheltered savings and the tax deductibility of deposits, not everyone is convinced the FHSA will help a significant number of younger Canadians enter the housing market.

This thing to me just seems like voter candy for millennials, it’s quite redundant

Rob McLister of RatesDotCa

“I don’t know how beneficial it’s (FHSA) going to be for a lot of the young people that are having a hard time saving up to buy a home in the first place,” said Jason Heath, a financial planner and managing director at Objective Financial Partners.

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Heath said paying less tax is a good thing and describes the tax refund component as “mildly beneficial,” but noted that the extent of the savings would be in the hundreds or maybe thousands of dollars.

“That barely puts a dent in it,” Heath said, of the cost of entering the market.

While Heath sees some benefits, others see the FHSA as a purely political manoeuvre.

“This thing to me just seems like voter candy for millennials, it’s quite redundant,” said Rob McLister, a mortgage editor at RatesDotCa.

McLister said that there are already two federal savings programs that can be used to save for a down payment.

Canadians already have the ability to take up to $35,000 out of their RRSPs penalty-free via the Home Buyers’ Plan, but most do not take advantage. In 2020 around 110,000 individuals withdrew funds from an RRSP account under the Home Buyers’ Plan, according to an email from Canada Revenue Agency. Of those individuals, only 17,000 withdrew the full $35,000.

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The other federal program is the TFSA, which allows people to generate tax-free returns that can be pulled out with no strings attached for any purpose, including a down payment.

Jason Pereira, a partner and senior financial planner at Woodgate Financial, also questioned the need for additional savings space.

With $35,000 in room from the HBP and the lifetime TFSA limit standing at $75,500, he said homebuyers already have room in existing savings vehicles to accumulate over $110,000.

“Are we really saying that the problem here was that people couldn’t save another $40,000?” Pereira said.

Both McLister and Pereira suggested that any added savings space could be handled within existing vehicles.

Pereira said if the FHSA was intended to be tax-deductible and tax-free then you could have just expanded everyone’s RRSP room by $40,000 and created a secondary version of the Home Buyers’ Plan with no need for repayment. If it was not going to be tax-deductible, then you could have used the TFSA and added $40,000 of room, he said.

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But as Heath notes, most people saving for a home haven’t come close to maxing out their TFSAs.

That means in his view that the FHSA would likely benefit higher-income earners — or the children of high-income earners — the most.

While the Liberals are the only party to propose a dedicated savings accounts, the other primary parties have also announced measures to address housing affordability.

The Conservative Party said it will address the issue by banning foreign investors from buying a home if they are not living in or moving to Canada. The party also said it will build one million homes in the next three years and create incentives for first-time home buyers.

The New Democrat Party said it will create at least 500,000 units of affordable housing within the next 10 years, more than half of which will be completed within five years. The NDP also said it will incentivize affordable home construction by waiving the federal portion of GST and HST on construction projects for new affordable rental units.