Q: Will We Pay Less Tax if We Re-Mortgage?

Having paid off our mortgage some years ago, we have been offered a job with accommodation provided. I am told that if we rent out our house, we should re-mortgage it as we would pay less tax on the rental income. Is this true?

A: Arthur Weller Replies

You have been told correctly. The interest you pay your lender (not the capital repayments of the loan) can be offset against the gross rental income, and you only pay tax on the net rental income.

However this only applies if the loan is not more than the market value of the house when you start to rent it out e.g. if the house is worth £150,000 when you start to rent it out, and your loan is £125,000, then all the interest is allowable. Let's say five years after you start to rent it out the house is worth £250,000. You increase your mortgage to £200,000. Only the interest on £150,000 out of £200,000 is allowable i.e. three-quarters of your interest payments. The interest on the remaining £50,000 is not allowable. So, before you begin to rent it out, get an accurate valuation.