You have completed your first meeting with Harper and Riley Evans. You are confident that you now have most of
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The Evans family is happy in their home that they purchased a little over two years ago. It is registered in both of their names. They estimate that the house is worth $650,000 now. The outstanding balance on their bank mortgage is approximately $200,000 with monthly payments of $1,187. (5.2%, 5-year term, 25-year amortization). The Evans are not sure that the mortgage rate on their current home is reasonable and are concerned what the mortgage rate will be upon renewal. They do not want to see their interest rate increase. Harper would prefer to see it decrease if possible. The bank also insisted they have mortgage insurance on the house before the mortgage received approval.They purchased the insurance but are unsure of what coverage they have and how much they are paying for it.
During the meeting, it seems that Harper is more risk averse than Riley. Harper appears to be moderate, or even conservative, in her willingness to seek risk. You know that you will have to conduct a risk profile analysis to determine if the Evans have the capacity for risk, regardless of their willingness. Riley believes they can earn an 8% return on their RRSPs and 6% on their non-RRSP investments. You believe a discussion concerning current returns is necessary given that the Evans’s expectations may be unrealistic. Despite that they likely have different risk profiles, Harper and Riley are similarly invested in their RRSPs. This is because they are usually in a hurry to purchase RRSPs before the contribution deadline. Not a lot of thought goes into choosing the investment. Currently their RRSP holdings are: RRSP – GICs - $8,000 (Riley), $4,500 (Harper) RRSP – Bond mutual Funds - $5,000 (Riley), $9,500 (Harper) When a friend of Riley’s asked if he and Harper “maximize” their RRSP contributions each year, Riley said yes. He is uncertain. He is not sure what is the maximum. Riley has asked that you explain to him how to calculate their annual maximum RRSP contribution limit, so he knows if he and Harper are “maximizing”. As it relates to planning assumptions, Harper and Riley agreed with your suggestion that any projections or calculations are based on a 2.1% inflation rate (as per the FP Canada 2022 Guidelines).
Question 1: The Evan’s mortgage is renewing in 12 months. The Evan’s agree that they could change their payment frequency to accelerated weekly. How many years it will take now to pay-off their mortgage. How much would they potentially save them in interest on the TERM of the mortgage? How would this impact their cash flow and amortization? (Note: You do not have to calculate EFFECTIVE weekly rate)