What is the most tax efficient way to take out a mortgage?

I own a property outright, and want to rent it out once I've bought another slightly bigger one. Tax-wise am I best taking out a mortgage on my original property and then using the cash as a deposit on my investment, or simply taking the mortgage on the second property?

Arthur Says

The fact of the matter is that the interest that is charged on the loan, whether it be from your main residence or the investment property can be offset against the rental profits. This is because the property you are buying is going to be used for your lettings business. So the question is ‘which method of financing is likely to reduce the lowest amount of interest charge on your loan, as the lower the rate of interest then the greater the rental income profits you will have.

Given that in general buy-to-let mortgages tend to be higher than residential remortgages it could be more beneficial to take the mortgage out of your main residence. If you find that this is the case then you will make a great profit, which will mean more tax. However your net profit will be greater which will mean more cash in your pocket.