As far as CGT is concerned, the mortgages are irrelevant. What you do with the remortgage monies is up to you but you won't get a deduction for them against property 1.
If you sold property 1 today, you would make a gain of £349,000 or so (£650K - £301K). You can claim the costs of purchase and disposal against the gain. That part of the gain covered by your occupation of the property will be exempt from CGT as will that part of the gain covered by the last 18 months of ownership. As you have let the property as well as having lived in it, you will be entitled to a further deduction from the gain called letting relief which will be the lesser of:
1 £40,000 per part owner,
2 the sum of the gain covered by your occupation of the property and the gain for the last 18 months of ownership and
3 that part of the letting period gain not covered by the last 18 months of ownership.
Take a look at example 9 in HS283 to see how this works.
There are two rates of CGT for residential property, 18% and 28%. The rate or combination of rates that you will pay will depend on the level of your income in the tax year you make the gain. No more than £32,000 can be taxed at 18% and that figure will reduce by £1 for every £1 of income you have in excess of £11,000, the personal allowance.
I hope this helps but let me know if you have any further questions.