Phyllis age 43 earns $220,000 with a 50% MTR has a few planning issues she has approached
Question:
Phyllis age 43 earns $220,000 with a 50% MTR has a few planning issues she has approached you about. Phyllis's mortgage is renewing this month in the amount of $500,000. She has secured a 5-year fixed term rate of 1.55% amortized over 20 years compounded semi-annually.
Phyllis's banker suggested she borrow more than the $525,000 for her mortgage and invest the funds because "markets are down, the 5-year variable rate is cheap and there is a great tax advantage in doing so". Her current long-term investments are as follows: Non-Registered investment FMV $525,000 ACB $545,000 (100% equities); RRSP's FMV $490,000 ACB $305,000; TFSA FMV $96,500 ACB $81,500. Her risk tolerance is moderate aggressive (70% Equity; 30% fixed income) except her non-registered investments are all equities. You advise Phyllis that given the current markets this is a good time to re-balance her portfolios to optimize tax efficiency and take advantage of the low interest rate environment:
Assumptions:
Property taxes: $6,000 annual
Heat: $1800 annual
Hydro: $2400 annual
Other Debt: $12000 annual
No Condo fees
- 1) Calculate Phyllis's mortgage payment.
- 2) Calculate her GDSR and TSDR on the new mortgage. Does she qualify
- 3) Explain the concept of a debt swap to Phyllis and why you may suggest this over borrowing more funds.
- 4) Show Phyllis the interest paid over her entire 20-year mortgage and the tax benefit she could receive (not the annual savings but for the entire 20-year period). Assuming MTR does not change over the time period.
- 5) What considerations are there before recommending a debt swap?
- 6) Would you recommend a debt swap to Phyllis and why?
- 7) What circumstance would you not recommend a debt swap?
- 8) What are the risks of a debt swap for Phyllis?