Own house outright; want to move. Options?

[LookAtMyCat]

We own our house outright and it is worth ~160k. We would like to move to a new house with a budget/value of around 200-250k. As I see it, we have 2 options. One of which I understand and one I don't:

1) Sell our house. Use the 160k as a deposit on a new house, and take on a small 40-90k mortgage. We did go down this avenue with a mortgage broker last year but we didn't find anywhere to buy so took our house off the market (after 2 offers).

And the one I think would be better but don't understand...

2) Rent out our house. Take out large mortgage on new 200k house. Use rental income from house 1 to pay most of the mortgage on house 2.

I'm thinking it can't be that easy, can it? Would we have to raise a deposit for house 2 mortgage, or could we use house 1 as collateral?

[LookAtMyCat]

But would that not mean that we'd have much larger repayments on house 2, with the rent from house 1 only covering the new mortgage on house 1?

Personally I favour option 1 but the wife is keen on option 2!

[LookAtMyCat]

Sarnie said:

No, quite the opposite, you would have a large surplus of rent that contributes to the payment of the residential property!

How much would your current property rent for?

House 1 would rent for ~650-700 a month. When we spoke to a mortgage advisor last year she said if we sold our ~160k house and bought for ~250k then the repayments would be ~450 a month on the 100k on-top mortgage. I'd assume then that if we mortgaged house 1 at 75%, took out a mortgage on house 2 at ~100k on top of what we took from house 1 mortgage, we'd have approx 2 x 450 p/m mortgages to pay. Leaving us with ~2-300 a month on top to pay.

This would be probably be complicated by the fact that I am self-employed and the wife does not work. I guess the bank would certainly take into consideration what would happen if we didn't have tenants for a while how the mortgages would be paid.

[LookAtMyCat]

Sarnie said:

And he doesn't need to show he can cover both mortgages.

That's where the the issue would come in for us as being self-employed and can essentially earn as much as I like up to a percentage of my turnover (just lose receipts). Last year I put in absolutely everything purchase-wise because we only wanted the smaller mortgage (this was going on what our mortgage broker told us). So now if we wanted a larger mortgage, or had to prove we could cover both, we probably couldn't even if I put this years accounts in showing larger earnings.

Luckily my wifes parents are quite wealthy and would always help us out if we got into 'trouble, but obviously the bank won't take that into account! We also have a mortgage currently on our stables & land of 450pcm so I expect that will also be taken into account.