Bank stocks are Canadian darlings of the moment: a lot of people are concentrating on the relatively high dividends and solid blue chip stocks, still scared after the tech fallout of 2000.

I’m sticking with the mining sector for now but will be looking to diversify next year. However bank stocks will not be my first pick, because it’s still not clear which ones will take a bigger hit from the sub-prime mortgage problems. This is not a big issue in Canada, at least not yet, but I still think there are going to be some repercussions for the Canadian banks when the rates are raised.

I’m biting my nails, not sure whether to convert our Scotia Flex mortage into a fixed one. If Bank of Canada raises the rate just once this year, I wouldn’t even be thinking about it, but the rumour is it may happen twice and that means we’ll take a “hit” starting in September, and then again next March. Clearly this calls for a spreadsheet. (I hate this, makes me feel all grown up).

We have a ScotiaBank variable rate mortgage. The rate is Prime Minus 0.75% and is reviewed every 6 months.

I looked back at how unstable variable rate mortgages can be. We started with 3% on September 1, 2004

Rate Increase Date / Rate
January 1, 2006 – 3.5%
March 1, 2006 – 4.5%
September 1, 2006 – 5.25%

That’s a 1.75% jump in just one year. Principal & Interest payment have gone up from $640 at 3% on $135,237 to $797 at 5.25% on $127,573. We’re now paying $157/month or $1,884/year more, on a mortgage that’s $8,000 smaller.

The sting of this increase wasn’t bad due to the small mortgage size. We would definitely go with a fixed rate on a larger mortgage at this point. Variable rates are way too volatile and with a sizable mortgage the difference would be several hundred dollars by now.

Variable rate mortgage payment history

scales.gifA few times I’ve been tempted to prepay our mortgage. We can do it as many times as we want, with no penalty. But even without crunching the numbers much, I see it doesn’t make sense for us to prepay.

1. We don’t plan on staying in the condo for more than 3 years (for a total of 5-6 years). Our current mortgage rate is 5.25%. We wouldn’t earn interest above that, in fact the most our money is making us is 4.01%, but the difference of 1.24% short term (3 years) wouldn’t affect our Net Worth in any signficant way.

2. Less cash, same taxes. Since none of the principal gets written off, by prepaying we would just reduce the amount of cash available and still have to pay tax on it. We write off a portion of the mortgage interest thanks to running the business mainly out of home. Tax advantage outweighs the slightly lower interest payment.

3. No significant savings. According to online calculators if we prepay $10,000 just once, we’d shave off about $1,200 of interest over the remaining 3 years. If we keep this $10,000 in a savings account or a GIC for 3 years, it would compound to $11248.64 (pre-tax interest $1,248.64). I’d rather have easy access to this cash and make about the same amount of money. Ok, it would be $936.48 after tax if locked up for 3 years. $250 seems is just too little savings for plunking down $10,000.

And on a somewhat unrelated but pleasant note – a condo on our floor, identical to ours is up on the market for $219,000. I’m going to watch how quickly it moves and how much of the asking price they get. Even if they only get 96%, which seems to be average for Toronto condos, that would still mean an appreciation of about 12% annually over the last 3 years! That would be fantastic, much better than 5% that I expected.