Phantasmix (aka Re: money)

Wow, I just found out they now allow 35-50 year term mortgages in the US, up to 40 years in Canada, which of course means a lot lower monthly payments. Very attractive option if you plan to stay in your home for only 1-2 years. Not a very good choice if you’ll be in your place for a few years.

Here’s a sample Amortization Comparison table

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).

New York Times fancy-shmancy visual calculator:

It is better to buy or rent?

I think you may have to be subscribed to the web site, but the calculator is in the free zone.

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.

A 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.

Mortgage principal is not tax-deductible, so if you’re making a significant payment towards the principal, double-check what your tax liabilities will be in that year. Make sure you will have enough cash left to pay the taxes.

Of course, if you’re paying down the mortgage out of savings, you don’t have to worry about that. That’s how it works in Canada - you don’t pay taxes on capital gain when you sell your residence, but the money you pay for the house is taxed in advance, so you’re always paying down the principal with your after-tax dollars.

For those of you who just went, “Pffft, this is common knowledge”, sorry to bore you, but to those people out there who like me had no clue - just take note.

We made our downpayment out of then-current year’s income, and were hit pretty hard with a $11,000 tax bill the next spring. When we were buying the condo, I was 100% confident that the downpayment was a tax-writeoff! Not so, and imagine what a surprise it was. I felt pretty dumb, but then realized why I made the mistake. I lived in the States for a few years, and assumed that Canada was just like the US in financial aspects. It’s simply not true, Canada’s policies are very different in many ways. I’m still learning!

In Aug 2004 we took out a mortgage on a $153,500 condo purchase.

We could put down 0-14% and would have to add 7.95% in CMHC (Canada Mortgage and Housing Corporation) mortgage insurance premiums! Surprised at the high rate? It used to be quite a bit higher for self-employed people compared to salaried employees. We put down 15% ($23,025) which lowered our mortgage insurance to 3.65% ($4,762.38) - still a ton of money on just a $130,475 loan.

But things have improved! In July 2006 CMHC have enhanced and improved their terms for borrowers and now self-employed are treated the same way as salaried people. Right now we’d only have to add 1.75% insurance to our mortgage. Here are the current rates:

Table of CMHC Mortgage Loan Insurance Premiums

Note: See your lender for premium surcharges and other terms and conditions that apply.