Why first-time homebuyers should use a TFSA for their down payment savings

The road to homebuying may be bumpy, but a Tax-Free Savings Account (TFSA) can help pave the way.

More first-time homebuyers, and especially young investors, are using a TFSA to save their down payment dollars. Why? Because it’s easy to use and any withdrawals are tax free. It’s also flexible – since you can remove funds without penalty, you can dip into your savings in an emergency and then easily replenish them later. Lastly, you may be able to put a lot more of your down payment in a TFSA than you can in a Registered Retirement Savings Plan (RRSP).

Conceptually it’s a good idea, but how does it work in practice? We profile two people at different stages in their homebuying life to find out how they’re saving and why they’re using the TFSA.


When your homeowning dreams come true

For the last ten years, Natalie Maxwell has been dreaming of owning her own house – an abode with at least a little bit of space somewhere in the Greater Toronto Area. That dream finally came true when the 30-year-old employee assistance program staffer and her boyfriend moved into a 1,600-square-foot house in Guelph, Ontario. “It’s terrifying to be buying a house,” she says, half joking. “But it’s in a nice neighbourhood and I can walk to work.”

Natalie has made saving a priority in her life. For much of the last decade, she’s saved about 15% of her paycheque, but over the last three years she’s upped her contributions to nearly 30%. Because of how much she’s put away, Natalie is using both her RRSP and her TFSA for her down payment.

With the RRSP, she’s making use of the Home Buyers’ Plan, a program that lets people remove up to $35,000 from their RRSP tax free, as long as they pay that money back over 15 years. The rest of her down payment is coming from her TFSA, an account that she generally prefers to the RRSP. “There’s a limit on how much you can take out for the Home Buyers’ Plan and so I’m putting more into the TFSA,” she says. “It’s also easy to use.”

She likes the TFSA’s flexibility – she knew she could use the money for something else if her home ownership plans didn’t come to fruition – and its simplicity. While you can invest in the same mutual funds or exchange-traded funds (ETFs) in an RRSP and a TFSA, not having to worry about any potential tax implications is helpful, she notes.

When Natalie started investing a decade ago, she bought medium-risk mutual funds, which grew over time and helped boost her down payment. But when the house purchasing discussions picked up, she put her money into lower-risk investments. When she started looking for a home late last year, she moved all her down payment savings into cash. “We didn’t want to lose the money we knew we’d need soon,” she explains. “I’m happy we did that.”

Thanks to diligently saving inside of a TFSA, she can now call herself a homeowner. “I’m excited,” she says. “And it’s a surprisingly large house for a first-time homebuyer.”

Top takeaway:

You may be able to put a lot more of your down payment in a TFSA than you can in an RRSP. So, consider contributing to (and using) your TFSA savings first for your down payment.


Dreaming of a homebuying future

Brittany Stephen is looking forward to the day that she and her boyfriend can move out of their rented downtown Toronto apartment and buy a larger home north of the city. “Newmarket or Aurora,” she says, revealing her potential post-big city landing spots. “We need a little more space.”

For the past five years, Brittany, a 29-year-old bartender, has been putting about 15% of her monthly income into a TFSA, with the hopes of using that money soon, although she doesn’t have a firm date as to when she might move. Her financial advisor suggested she put her down payment inside of her TFSA, and she’s happy she did: “I like it because it’s flexible,” she explains.

That flexibility came in handy last year, when she had to take some time off work. She took some money out of her TFSA without penalty, which she wouldn’t have been able to do if she had invested it in a RRSP. With an RRSP, you must pay tax on any withdrawals, and you permanently lose the contribution room. She was able to pay back the money she removed from her TFSA without any problems.

Brittany is currently invested in a mix of mutual funds, stocks and bonds. Thanks to both her and her boyfriend’s savings, she will have a solid down payment when it comes time to buy.

Top takeaway:

Flexibility is one of the TFSA’s main advantages. While it’s always a good idea to keep your housing dollars in the account until you need it, if you have to remove some money in an emergency, you can do so with no penalty and then recontribute later.


Overall, when it comes to saving for a down payment on your first home, TFSAs are a top choice. They offer flexibility, and the potential to save more, with short- or medium-term investment objectives in mind.

ETFs for your TFSA
Are you keeping your down payment dollars in a TFSA? TFSAs can hold a variety of investments, including mutual funds and ETFs. Here are some ETF investment options that may work well for you, depending on your goals and your time horizon.

Fidelity Canadian High Dividend Index ETF

This ETF is ideal for people who have eight to ten years to go before buying a house. It holds mostly blue-chip Canadian stocks – which are generally more stable than smaller-sized companies – all of which pay dividends. Because they are paid into a TFSA, those dividends can grow tax free. While the ETF could rise and fall in price more frequently in the short term, over the long term your assets will likely get a boost from both share price and dividend increases.

Learn more about this fund


Fidelity Global Monthly High Income ETF

Those buying a home in about five years might consider this professionally managed balanced ETF, which invests in dividend-paying equities and fixed income. Savers can still grow their assets, yet enjoy lower market risk, thanks to having a fund manager overseeing the ETF. That balance is ideal for those getting closer to a house purchase.

Learn more about this fund





Top takeaways are provided by Michelle Munro, tax and retirement subject matter expert and financial insider at Fidelity Investments Canada.