Buying second house, tax implications

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frisbee

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We are buying a second house which we plan to live in and rent out our first house. The value of the first house is 300,000 and no mortgage is owed. The second house is costing 800,000 and we will need a 280,000 mortgage. We are both paying income tax at the higher rate.
My question is whether we would be better to take the mortgage out on the first or second house from a tax point of view? (-mortgage interest etc being an allowable against rental income). Evidently if we take the mortgage out on the first house the LTV and interest rate will be higher.
 
Mortgage interest is only allowed where the money was borrowed to buy an investment property. You are borrowing to buy your home, so you will not be able to claim tax relief on the interest.

It makes no difference from a tax point of view, whether the mortgage is secured on your home or your investment property.

Likewise if you borrow money secured on your home, to buy an investment property, that interest is allowed for tax purposes.

It raises an interesting issue. Should you sell your existing home and buy your new home for cash? Then borrow €280,000 from the bank to buy an investment property. With stamp duty reduced to 1%, this is probably a sensible strategy.

But the bigger question is whether you should have a property investment of €300,000 when you already have a property worth €800,000. It seems to me that you have too many eggs in the property basket.
 
Thanks Brendan. That's as I suspected. It seems to make no sense though that we'd be better to sell our first house and buy the identical neighbour's house as it would be more tax efficient. As ever it's not purely a financial decision as we have an emotional attachment to our first Home and a good friend we could rent to for a reduced rent. I'm sure the financial decision as you said would be to in fact sell the first house and buy the second for cash
 
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