Mortgage Clinic: 'How can we raise cash from our property?'

By Stephen Pritchard

"My husband and I own a mortgage-free property, which we rent out. If we took out an equity-release loan on the property, could we get tax relief on the interest, on the basis that it is a business expense? If we can't go for an equity release, what approach to raising a mortgage do you suggest?"

ME, by email

If a homeowner wants to free up some cash from a property, there are three basic ways they can do it. They can sell the house and move to somewhere cheaper; they can remortgage it, borrowing more; or, if they qualify, they can opt for an equity release scheme.

Equity release works by either "rolling up" the interest, so that it's paid off when you sell the house, or by selling a share in the house to a finance company.

The main reason to opt for an equity release scheme is to avoid paying monthly interest on the larger mortgage. It also comes with restrictions: a minimum age and small lending limits (often you can only borrow 30 to 40 per cent of the property's value). Only one company, New Life, offers equity release schemes for properties that are let.

If you can afford to cover monthly interest payments on a mortgage – ideally from your rental income from the property – then a standard buy-to-let mortgage is likely to be cheaper and flexible.

"If you're not actually living on the rental income, a buy-to-let mortgage would release capital and should cost less than equity release, as the interest is paid monthly out of the rent, as opposed to compounding and being paid at the end as a cut of the property's sale proceeds," says Katie Tucker of mortgage brokers John Charcol.

With a buy-to-let mortgage, you could potentially borrow up to 90 per cent of the rental property's value, as long as the rental income covers your payments. Another advantage of buy-to-let is that lenders look at the rent, rather than your income, when they agree the loan. This could help if your main income is a pension.

You also keep full ownership of the property and can sell it whenever you like – although if you think you might need to sell soon, be sure to look at mortgages without early redemption penalties. You can choose between an interest-only and a repayment mortgage with a buy-to-let loan.

In your situation, you could be better off paying mortgage interest every month, because it is a business expense. You can offset this against rent received, and only pay income tax on the difference. Capital repayments are not allowed as a business expense, so many landlords opt for interest-only loans. However, repayments offer greater peace of mind.

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