FHSA vs RRSP Home Buyers Plan: Which Account to Use First for Your Down Payment

You've been saving for three years. Your FHSA has $28,000 sitting in it. Your RRSP holds another $17,000. The pre-approval came back at $520,000, and you need $65,000 for the down payment and closing costs. Both accounts let you pull money for a home purchase, but the math on which one to tap first isn't obvious.

The FHSA lets you withdraw everything tax-free for a qualifying home purchase. The RRSP Home Buyers Plan lets you borrow up to $35,000 per person - but you have to pay it back over 15 years. Most people assume FHSA first makes sense because it's designed for home buying. The actual decision depends on your income bracket and how quickly you can refill the RRSP room.

Here's where the standard advice breaks down and which account sequence actually saves you money.

The FHSA Gets Depleted Permanently

The First Home Savings Account closes the year after you make a qualifying withdrawal. You can't replace that contribution room - it's gone. The maximum lifetime contribution is $40,000, and whatever you've built up disappears once you use it for a home purchase.

This matters more than the marketing suggests. If you've contributed $8,000 annually for three and a half years, you've used $28,000 of your lifetime room. Pull it out for the down payment, and you can't rebuild that tax shelter. The FHSA isn't like a TFSA where withdrawals create new room the following year.

Your RRSP room, by contrast, gets replaced automatically. Earn $70,000 this year, and you'll generate $12,600 in new contribution room for next year regardless of what you withdrew under the Home Buyers Plan. The HBP borrows against future contributions, but it doesn't eliminate the tax shelter permanently.

Why Your Marginal Rate Changes Everything

The Home Buyers Plan only makes financial sense if you can pay it back at a lower marginal tax rate than when you made the original contribution. Contribute at 29% in Ontario, pay it back at 29%, and you've gained nothing except a temporary loan from yourself.

Here's where most advice gets the sequence wrong. If you're earning $75,000 in Ontario and contributed to your RRSP over the past few years, you received refunds at the 29.65% combined rate. Use the FHSA first, and you'll be repaying that RRSP money at the same rate - no advantage.

But if your income drops after buying the house - parental leave, career change, reduced hours - the HBP payback happens at a lower rate. You borrowed money that saved you 29% in tax and repay it when your rate is 20%. The 9-percentage-point spread is real savings.

The CRA tracks Home Buyers Plan repayments separately from regular contributions, which means you can see exactly what this costs over 15 years.

When RRSP First Actually Wins

If you're confident your income will be higher in five years than it is today, flip the conventional sequence. Use the RRSP money first through the Home Buyers Plan.

A teacher earning $65,000 today will likely earn $75,000 in five years based on salary grids. Software developers and nurses see similar predictable progression. Taking from the RRSP now lets them repay at higher rates later - but the key is that new RRSP room keeps generating based on higher earnings.

Use the FHSA second, and you preserve more total tax-sheltered room long-term. The RRSP generates $13,500 in new room annually once income hits $75,000. The FHSA generates nothing after you close it.

This only works if you're disciplined about the payback. Miss an HBP repayment, and it gets added to your taxable income for that year. The advantage disappears if you can't sustain the $2,333 annual payments.

The Income Drop Scenario Changes the Math

Most home buyers don't consider that their financial situation might change after purchase. Mortgage payments, property taxes, and maintenance costs often force budget adjustments that affect income decisions.

If you're planning to have kids within three years of buying, the RRSP-first strategy makes more sense. Parental leave income drops significantly - $55,000 instead of $75,000 means the HBP repayments happen at 20.05% instead of 29.65% in Ontario.

The same logic applies to anyone considering freelancing, starting a business, or moving to part-time work after buying. The Home Buyers Plan becomes a tax arbitrage play when life changes drop your marginal rate.

How the Numbers Actually Work in Practice

Take someone earning $68,000 in British Columbia with $25,000 in FHSA savings and $15,000 in RRSP room they've used. They need $40,000 for their down payment.

FHSA-first sequence: Withdraw $25,000 tax-free, then $15,000 from RRSP through HBP. Total available: $40,000. HBP repayment: $1,000 annually for 15 years at current tax rates.

RRSP-first sequence: Withdraw $15,000 through HBP, then $25,000 from FHSA. Same total, same immediate tax treatment. But the HBP repayment happens while RRSP room keeps building at 18% of income.

The difference shows up five years later. In scenario one, they have no FHSA and must rebuild RRSP room from scratch. In scenario two, they have no FHSA but have accumulated $61,200 in additional RRSP room they can use for retirement or other goals.

Where This Strategy Breaks Down

The RRSP-first approach assumes you can actually make the repayments without stress. Home ownership costs more than most people budget for, and the $1,000-to-$2,300 annual HBP repayment can become a problem if other expenses creep up.

Furnishing costs, unexpected repairs, higher utility bills, and property tax reassessments all compete for the same money you need for HBP repayments. Miss a payment, and that amount gets added to your taxable income - essentially forcing you to pay tax on money you never received as income.

The FHSA withdrawal has no repayment requirement. Once you use it for a home purchase, it's done. If your post-purchase budget gets tight, you don't owe the government anything.

The Timing Problem Nobody Mentions

Home purchases don't wait for optimal tax planning. Your FHSA might have $22,000 in March when you need $35,000 by June for closing. The RRSP money might be locked in GICs that mature in August.

Real estate moves on seller timelines, not your savings schedule. Sometimes you take what's available when you need it, regardless of which sequence theoretically saves more money.

The HBP also requires 90 days between RRSP contribution and withdrawal for first-time buyers. If you're planning to top up your RRSP in January and buy in March, the timing doesn't work. The FHSA has no such restriction - you can contribute and withdraw for a home purchase immediately.

Which Account to Drain First

Use RRSP first if your income will predictably increase over the next five years or if you expect major life changes that will drop your marginal rate temporarily. Teachers, government workers, and healthcare professionals often fit this pattern.

Use FHSA first if your income is stable, you want to avoid repayment obligations, or you're unsure about your financial stability after buying. The tax-free withdrawal eliminates future complications even if it costs slightly more in theoretical tax efficiency.

The math gap between strategies is smaller than most analyses suggest - usually less than $2,000 over 15 years for typical first-time buyer scenarios. The bigger risk is choosing a strategy you can't execute consistently rather than optimizing for the last percentage point of tax efficiency.

The FHSA vs HBP decision matters less than having enough saved in either account to avoid CMHC insurance premiums or stretching your mortgage beyond what you can afford. Both accounts work for home purchases - just pick the sequence that matches how your life actually operates.