With 5,000 to spare, is it better to pay off car loans (higher interest rate but shorter period) or mortgage (four years into a 15-year mortgage?

Which debt?

If I have two mortgages - the smaller with 30,000 remaining in year 10 of a 15-year mortgage and a larger one, which has more than 11 years remaining on a 15-year loan - is it better to pay off the larger mortgage due to compound interest or the smaller older one?

Ms M.M., Dublin

As a general rule, you should not be saving while you have debts outstanding. An obvious exception is the case of Special Savings Incentive Accounts, where the interest rate on offer is likely to exceed the interest bill accumulating on loans such as a mortgage.

In your case, you should pay off the car loan, which bears the higher interest rate, first. Apart from anything else, you probably attract some interest relief on the mortgage debt.

In relation to the second question about the two mortgages, you should first pay whichever one carries the higher interest rate regardless of the length of time remaining on the debt. If both attract the same rate of interest, I would suggest you pay off the smaller debt first.

While it will not save you money, it will help build up your credit rating as you will have paid off the debt ahead of schedule.

However, do not do this at the expense of falling into arrears on the second mortgage, as that would only undo any benefit and leave you with a mark against your credit rating.

PRSAs

I am thinking of investing in a PRSA but I would prefer to invest in a simple savings product and not in risk-prone equities.

Why must I pay an intermediary a 5 per cent set-up charge and a 1 per cent annual charge in this situation? After all, no investment advice or management costs are involved where the money is simply put on deposit.

To put it another way, why has the Government designed the PRSA scheme in such a way that I can't claim tax relief on money put irrevocably on deposit to provide a pension?

Mr J.D., e-mail

The aim of Personal Retirement Savings Accounts (PRSAs) is to encourage a larger portion of the population - working or otherwise - to set aside money now to help fund their retirement.

Personally, I think it is a little misleading because, intentionally or otherwise, it gives the impression that a little put away today can make a meaningful difference to your retirement income and the truth is that it won't.

People equate PRSAs with the amount they put into occupational pension schemes but forget the funding of those schemes by employers.

The fact is that if PRSAs are to work meaningfully, people will have to put considerable sums into them. Alternatively, they will need to rely either on a marked improvement in investment performance over recent experience or hope they can encourage employers to contribute.

In any case, there will be no point in putting money into a deposit account. To understand this, all you have to do is look at the returns offered by the average deposit account. They don't even match inflation.

In other words, the €100 you put into a deposit account today is worth less in a year's time. On that basis, the real value of it when one gets to retirement is depressing even to consider.

The Government has designed the PRSA scheme in such a way that people can gain tax relief on money invested with some possibility of providing retirement income.

The truth is that the only way to do this is to take some risks with the money in the hope of "beating" the market and growing the money invested so that it can provide a realistic income in retirement.

That means investing in equities, property and bonds, and doing so requires someone to set up the investment and someone to manage it. They do have to be paid, however much one can argue about how much that cost should be in the case of relatively simple products that merely track an index.

Rental income

My wife and I each owned our own respective homes before getting married. We have purchased a new family home, which we intend to live in as our main place of residence when it is completed. I have rented my own house and my wife also intends to rent hers in due course.

Can you advise us on the following?

1. What portion of the rental income is subject to income tax if the entire property is rented? We understand that if a room is let in a house then the first 7,618 of rental income is tax free.

2. If we sold one or both of the properties would they be subject to capital gains tax, if the gains were invested in our new family property? Is there a time period within which the sale of the properties would need to occur to minimise the capital gains tax due, after they ceased to become our main residences, that is when we were both single.

3. What will be the situation regarding interest relief on our new property. We would have both had approximately five years mortgage interest relief on our first properties. Will we still be entitled to interest relief on our new family home and at what rate? The cost of the new property is of the order of 400,000.

Mr B.M., e-mail

If you are renting the entire property, any income after allowable expenses is liable to income tax. The rent-a-room allowance to which you refer is a specific scheme and the threshold is not transferable to rental from an entire property.

If you sell either of the properties, they will be liable to capital gains in relation to that portion of their ownership during which they were rented. You say you are living in the properties for about five years (on the basis of the mortgage interest relief received). If you rent them for, say, two years before selling them, you would pay capital gains on two-sevenths of the gain on the sale - again allowing for expenses such as estate agency and legal fees and for indexation up to the end of last year.

There is a grace period in which you are allowed to own both properties while you try to sell the former home but this is negated by renting out the property.

You will be entitled to mortgage interest relief on your new home. It will be given as a tax credit at source at the standard rate of income tax, 20 per cent, on interest up to a maximum of €5,080 for a married couple - in other words, a maximum relief of €1,016. When you were first-time buyers, the upper limit was the standard rate of income tax on interest up to €8,000 for a couple and €4,000 for a single person.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.