Ask Noel

I am 38 years old, my wife is 34 and we have two children - aged four and six. We earn $70,000 a year each and we have combined super of $300,000. We rent but have two investment properties. Should we continue to make principal and interest payments on our two investments, or convert both to interest only and invest the additional money in shares?

Any money you use to reduce the loans on the investment properties will return you approximately 4 per cent after tax. I suggest a much better strategy is to convert the loans to interest only and use all your spare funds to invest in share-based insurance bonds. A reasonable return for these bonds should be 7 per cent a year and after 10 years they can be cashed-in tax free to pay off the debts. As they do not produce taxable income each year, you will be able to enjoy all the benefits of negative gearing without losing your tax deductions due to a decreasing debt.

Would you recommend buying an investment property given that interest rates have increased and are forecast to increase further?

It is never a bad time to make a good investment and rising interest rates should mean a slackening in the property market. I am sure there are bargains to be found but there will be many people looking for them. You will need to research the market and inspect properties until you find one that is a bargain - this is usually a neglected property in a top location owned by a vendor desperate to sell.

How does increasing or decreasing the interest rate by the Reserve Bank affect the economy? If the trading banks increase their rates, thus generating more income and reducing the spending money of their borrowers, they must offer higher rates to investors and thus put the generated increase back into the economy. If they retain the increased revenue then they must distribute it to their shareholders, again putting it back into the economy.

The purpose of raising interest rates is to slow down the economy because rate rises take money out of people's pockets. It tends to make people wary of taking on new projects or spending money on non-essential items. Also, higher rates mean that companies may earn less because of reduced sales and higher borrowing costs. It's a very blunt instrument, because we are still suffering labour shortages and retailers are advertising interest-free terms. Both these factors tend to negate the effect of rates going up.

Will the $50,000 cap on deductible contributions to super be indexed? It would seem unfair not to index this figure over time, as inflation would erode the value of this amount.

It will be indexed but for simplicity will be expressed in $5000 increments. If indexation runs at 4 per cent, it will rise to $55,000 in under three years. The $100,000 deduction allowed to those aged 50 and over will not be indexed.

This article is general in nature. Readers should seek further advice before making financial decisions.

Noel Whittaker is a director of Whittaker Macnaught, a licensed dealer in securities. Write to Ask Noel, Money, GPO Box 2571, Qld 4000, or visit moneymanager.smh.com.au/sitewide/askanexpert.

My 80-year-old mother has offered to provide me with a significant amount of money - $200,000 - as an interest-free loan or as a gift to assist with a home purchase. She is a self-funded retiree and receives no pension or government income. The offer is attractive but I don't want her to have any problems with the Tax Office on this. Would she be liable to pay tax on the investment value of the money? Would I be liable for any tax by accepting such a generous loan or gift?

If she makes you a gift or an interest-free loan there should be no tax ramifications for her. Just be aware that you will have no interest to claim as a tax deduction if you use the money for investment.