Unencumbered Mortgages
Owning a property outright, free from any debts, charges, or restrictions, opens up a world of possibilities. You might be considering how best to leverage the full value of your paid-off property to achieve your aims. One standout option is using your unencumbered property as security for a new mortgage.
In this article, we’ll guide you through the process of remortgaging a property you fully own - commonly referred to as an unencumbered mortgage. We’ll explain what it means to have an unencumbered property and how you can use it to improve your financial flexibility. We will go over:
What is an unencumbered mortgage?
The term ‘unencumbered’ refers to a property that is entirely mortgage-free. If you own such a property, then you hold 100% equity, meaning you’ve fully paid off your mortgage.
An unencumbered mortgage allows you to borrow against the value of a property you already own outright. Unlike a traditional mortgage, which is used to purchase or refinance a property with an existing loan, this type of mortgage helps you access the equity tied up in your home.
By releasing this equity as cash, you gain financial flexibility to fund projects like home improvements, investments, or other personal goals.
How do unencumbered mortgages work?
When applying for a standard residential mortgage, you typically provide a deposit and borrow the remaining amount needed to purchase the property. The size of your deposit, relative to the property’s value, determines the loan-to-value (LTV) ratio, which in turn influences the interest rate offered by the lender. A larger deposit results in a lower LTV and often more favourable borrowing terms.
An unencumbered mortgage, however, works differently. Since you already own the property outright, there’s no need for a deposit. Instead, you decide how much equity you want to access, and the lender calculates borrowing terms based on the LTV ratio of the new loan.
This process is alike remortgaging to release equity, as both involve borrowing against the value of your property. The key difference is that an unencumbered mortgage represents a new loan on a property which is free from any existing mortgage.
Why would you get an unencumbered mortgage?
Owning your home outright often signals financial stability, with no monthly rent or mortgage payments to worry about. While being mortgage-free is a substantial milestone, there are situations where accessing the equity in your property through an unencumbered mortgage could be a smart decision.
Life circumstances can change, or opportunities may arise where releasing funds from your home can provide valuable flexibility. Here are some common reasons why people get an unencumbered mortgage:
Home improvements or repairs: Finance major renovations or necessary repairs without dipping into your personal savings.
Debt consolidation: Pay off high-interest debts, such as credit card balances, by consolidating them into a lower-interest mortgage.
Property purchase: Use the funds as a deposit to buy another property, whether it’s for a family member, a holiday home, or a buy-to-let investment.
Education costs: Cover tuition fees or other higher education expenses for yourself or your loved ones.
Emergency fund: Establish a financial safety net to manage unexpected expenses.
Business ventures: Invest in a new business idea or expand an existing enterprise.
Am I eligible for an unencumbered mortgage?
Applying for an unencumbered mortgage is similar to applying for any other type of mortgage, but you’ll need to meet certain eligibility criteria. Lenders usually start with an affordability assessment, evaluating your income, credit score, outstanding debts, and regular outgoings to ensure you can comfortably manage the repayments.
Your chosen LTV ratio plays a big part in determining your options. For example, if your home is valued at £250,000 and you wish to borrow £200,000, your LTV would be 75%. Generally, a lower LTV results in lower interest rates and access to a wider range of mortgage deals.
Lenders also consider several other factors, including:
Reason for borrowing: Why you want the mortgage.
Employment status: Whether you’re employed, self-employed, or have irregular income.
Age: If you’re over 55, some lenders might be hesitant to offer long-term mortgages.
A distinct consideration for unencumbered mortgages is the length of property ownership. If you’ve recently been gifted or inherited a mortgage-free home, most lenders require that you’ve owned the property for at least six months before applying. Although, specialist lenders may waive this requirement in certain situations.
Can I get an unencumbered mortgage with bad credit?
Securing an unencumbered mortgage with bad credit can be challenging, as lenders typically reserve the best deals for borrowers who pose a low risk of default. Adverse credit issues such as bankruptcy, repossession, IVAs, CCJs, or a history of payday loans can limit your choice of lenders and result in higher interest rates on any available mortgage offers.
That said, owning an unencumbered property can work in your favour. Since the property is entirely debt-free, it represents valuable collateral, reducing the lender’s risk. This may help offset some concerns about your credit history and improve your chances of approval, even if the terms might not be as competitive as they would be for someone with good credit.
If you want to get an idea of your current financial health before you apply for a mortgage, you can use our free credit check tool (£14.99 per month after the free 30-day trial). Using it will help you view any possible mistakes or fraudulent activity on your profile, so you can effectively deal with such problems. The trial and subscription can be cancelled at any time.
Things to consider when getting an unencumbered mortgage
Taking out a mortgage on your unencumbered home can be an effective way to access cash for home improvements, property investments, or other financial needs. However, whether this is the right choice for you depends entirely on your circumstances.
Before applying for an unencumbered mortgage, make sure to carefully evaluate the following factors:
Your financial stability: Taking on a new mortgage means reintroducing debt, which comes with significant monthly repayments, plus additional fees and charges. Assess whether you can comfortably afford this new expense, even if your situation changes unexpectedly.
The purpose of borrowing: Consider why you’re borrowing against your property and how you plan to use the funds. Would a personal loan or other financing option be more appropriate given the interest you’ll pay over time? Ensure the benefits of the mortgage outweigh its long-term costs.
The risks involved: Owning your home outright provides unparalleled financial security. By taking out a mortgage against it, you risk losing your home if you’re unable to keep up with repayments. It’s essential to weigh the potential risks against the rewards of accessing your home’s equity.
How to get a mortgage on an unencumbered property
As we’ve outlined, applying for an unencumbered mortgage is a significant decision that requires careful thought. Navigating the process on your own can be difficult, but having the support of an experienced mortgage broker can make all the difference.
A mortgage broker can assist by:
Assessing your situation: Helping you determine whether an unencumbered mortgage is the right choice for your financial needs and goals.
Building your case: Presenting your reasoning convincingly to lenders and optimising your credit profile to increase your chances of approval.
Calculating your borrowing potential: Determining how much you can borrow and identifying the best LTV ratio for your circumstances.
Streamlining the process: Gathering the necessary documents to demonstrate affordability and guiding you through the application process.
Finding the right lender: Identifying the lender best suited to your position and securing the most competitive deal available.
At The Mortgage Genie, our team of expert brokers has years of experience helping individuals secure mortgages tailored to their unique requirements. If you’re interested, then be sure to contact us today at 019158098. And why not see how much you could borrow up to today by using our mortgage calculator?
This information is a guide only and should not be relied on as a recommendation or advice that any particular mortgage is suitable for you. All mortgages are subject to the applicant(s) meeting the eligibility criteria of the specific lender. You should make an appointment to receive mortgage advice which will based on your needs and circumstances.