Reference no: EM133122566

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?