...and doing it yourself

Isobel Berwick finds that there are savings to be made by using your initiative

Buying a property and renting it out can be an excellent way to make money. According to a survey published this week by the Joseph Rowntree Foundation, the average rented property produces an income of 8.8 per cent a year before costs. One-bedroom flats generate the highest returns, 12.5 per cent across the UK.

Unfortunately, the new scheme being promoted by Arla is expensive. A more rewarding alternative may be to use a little initiative in setting up your own re-mortgage deal. You can save even more if you find your own tenants and manage the property.

If you have equity in your existing home, the most cost-effective way to raise funds is to negotiate a re-mortgage on your existing loan. Phillip Cartwright, manager at independent mortgage brokers London & Country in Bath, says: "You'll get a better deal on the loan you already have, and you'll get the same good deal on your new property."

If you have a home worth pounds 120,000 and a mortgage of just pounds 40,000, Mr Cartwright suggests that the existing loan could be re-negotiated and pounds 40,000 taken out to buy a new rental property.

"National Counties Building Society, for example, charges 2 per cent over base rate for commercial loans. But if you re-negotiate your residential mortgage they offer a 2.5 per cent discount for two years. So you'll be paying 4.49 per cent on both parts of your loan - instead of 8.99 per cent on the commercial loan."

Figures provided by Arla itself show that agents' letting and management fees will be around 15 per cent of your rental income, plus VAT. On a flat generating pounds 600 a month in rent, you'd be paying the agents pounds 1,270 a year, although this can be set against tax. Managing agents also charge for any repairs and maintenance they carry out. If you have the time to maintain your own rental property, you'll save thousands in basic fees.

Whether you opt for the Arla scheme or decide to go it alone, the mortgage interest you pay on the loan to buy your rented property is treated an allowable expense. Other tax-deductible expenses include insurance, water rates and agency fees. You'll only be taxed on what's left of your income after all the mortgage interest has been taken into account.

If you are setting up your own re-mortgage deal, make it clear on your mortgage application that you are raising funds to buy a rented property. And make sure your existing borrowings are kept in a separate account from the money raised to buy the new flat or house. If you don't, you won't get the tax relief.

National Counties Building Society 01372 744155. Arla hotline 01923 896555. London and Country Mortgages: 0800 373300. Useful reading: `Which? Guide to Renting and Letting', pounds 10.99 (P&P inc).

The author writes for `Moneywise' magazine.