Personal Finance

Personal Finance

Newcastle Herald
3 July 2008
Noel Whittaker

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

A 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 unfortunately there will be many people looking for them. You will need to keep researching the market and inspecting properties until you find one that is a genuine bargain. This is usually a neglected property in a top location owned by a vendor who is desperate to sell.

Q How does increasing/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 their 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.

A The purpose of raising interest rates is to slow down the economy because rate rises take money out of people's pockets, which mean they have less to spend. Furthermore, 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. This tends to put a dampener on share prices. Unfortunately it's a very blunt instrument because we are still suffering critical labour shortages, and retailers are still advertising interest-free terms. Both these factors tend to negate the effect of rates going up.

Q My 80-year-old mother has offered to provide me with a significant amount of money $200,000, either on 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 other government-provided income.

While the offer is attractive, I don't want her to have any problem with the tax office on this.

Would she be liable to pay tax on the investment value of the money she provides?

Would I be liable for any tax by accepting such a generous loan or gift?

A 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.

Send your questions to noelwhit@gmail.

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