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. 1) Calculate Phyllis's mortgage payment.
2. 2) Calculate her GDSR and TSDR on the new mortgage.  Does she qualify
3. 3) Explain the concept of a debt swap to Phyllis and why you may suggest this over borrowing more funds.
4. 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. 5) What considerations are there before recommending a debt swap?
6. 6) Would you recommend a debt swap to Phyllis and why?
7. 7) What circumstance would you not recommend a debt swap?
8. 8) What are the risks of a debt swap for Phyllis?