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Can I 'remortgage' an inherited property to make a house purchase?



I want to release equity from an inheritance gift to get a mortgage on our first home

Keys to a new home on a mortgage agreement
A reader wants to release equity from an inherited Scottish house to help buy a house where he lives in England. Photograph: Moodboard/Corbis

Q I have inherited a property in Scotland which I own outright with no mortgage. It is being renovated and has an estimated final value of 170,000. I do not want to sell it as it has been in my family for generations. Instead, I plan to let it out as a holiday house. There are other holiday homes in the same village and initial research suggests it could be let for about 350-400 a week for a significant part of the year. My parents live nearby and have offered to manage it, initially.

Meanwhile, my partner and I are based in the south of England and would like to buy our first property together in this area for around 200,000. We have a combined income of 64,000 and savings of 12,000. Can I release equity from my Scottish house to help us buy a property? For example, could I mortgage the house in Scotland as a buy-to-let property (even though it has never had a mortgage), releasing for example 30,000 for a deposit on a second property? RB

A In theory, yes you can raise cash by taking out a mortgage on the house you have inherited, but not with a buy-to-let mortgage. That's because BTL mortgage lenders typically stipulate that rental income must come from an assured shorthold tenancy of at least six months, which rules out the weekly rents you will get from a property let to holidaymakers. However, there are a limited number of lenders including Leeds and Cumberland building societies which offer holiday-let mortgages for properties in the UK.

To qualify for a holiday-let mortgage you need a minimum income of 25,000 with Cumberland and a minimum of 40,000 with Leeds. You also need to be able to show that your pre-tax rental income is equal to 125%-130% of the mortgage payment, which shouldn't be a problem given the relatively small amount you want to borrow.

What may be a stumbling block, however, is the fact you don't yet own your own home, although how much of an effect this has depends on the individual lender. But if you did succeed in getting a holiday-let mortgage on the Scottish property, it would have to be taken account of in assessing your mortgage application for your home in the south of England, and so could affect how much you are able to borrow for that house.

The other thing you need to consider if you succeed in making the Scottish house into a holiday let is the tax position. As with a BTL property, you can claim the cost of mortgage interest against the rental income along with various other expenses such as insurance, advertising and so on.

The rules for what else is tax-deductible are more generous for holiday lets (whether you have a mortgage on the property or not), provided certain conditions are met: the property must be let furnished; be available to be let to the general public for at least 210 days in each tax year, and actually be let for 105 days; and you can't let it to the same person for a single period of more than 31 days.

More information is available in Help Sheet 253 Furnished holiday lettings (PDF) from HM Revenue & Customs.

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