Unencumbered Mortgages – what are they they and how do they work?
Perhaps you’re in this situation because you’ve inherited a mortgage-free property, repaid your mortgage in full, or paid for your home in cash.
Whatever the case, when you own your property outright, with no outstanding mortgage or other outstanding loans or charges due, it is known as an unencumbered property. You could choose to take out an unencumbered mortgage on such a property.
Having an unencumbered property places you in a great bargaining position if you’re thinking of remortgaging to release some of your home’s equity for something like home improvements, for example. You’ll still need to meet your lender’s mortgage criteria, though.
What is an unencumbered mortgage?
With this article, we intend to provide more information on unencumbered mortgages, tell you how to qualify and help you to decide whether it’s a viable option for your circumstances.
Use our online mortgage calculator as a guide for your monthly repayments now
We are expert mortgage brokers
We have access to over 200+ lenders in the UK to get you the best rates
Get your QuoteAre You Remortgaging Or Taking Out A New Mortgage?
Unencumbered mortgages are new loans, as you’re not remortgaging anything. This fact doesn’t stop some lenders from treating an unencumbered mortgage as a remortgage and only offering products from their remortgaging product range. It’s not really an issue, though, as the interest rates and the application process will, in essence, be the same.
Is An Unencumbered Mortgage Your Best Option?
Consider the following when deciding whether or not applying for an unencumbered mortgage is the best option for you.
A new mortgage on your unencumbered home means an additional monthly expense which, let’s face it, is not a small one. When you add in the interest rate, you will pay all the related fees; this is quite an undertaking. You should be confident that, even if your circumstances changed, you’d be in a proper position to maintain payments.
Be sure you want to borrow against your mortgage-free home and need the money as much as you think. Consider the alternative option of a personal loan that won’t put your home at risk if your situation changes.
Ensure you know the implications of signing a mortgage deal on a mortgage-free property. Owning your own home and having no monthly repayments is a position over half the population wishes they were in.
Making a new financial commitment of this magnitude could put that position at serious risk if you don’t maintain repayments. The last thing you want is to lose your home altogether.
Unencumbered Mortgage Lenders
When you own your property outright and don’t owe anything, you will have some fantastic deals at your disposal. Specific lenders will still consider your unencumbered mortgage a new mortgage rather than a remortgage, so it’s advisable to consult a mortgage broker to get a full market spectrum of your available options.
As you don’t have an existing mortgage and own your property outright, you could benefit as many mortgage lenders will see you as low risk. You’re not likely to experience many difficulties that arise during mortgage application processes, and obtaining an unencumbered mortgage should be problem-free.
Even for a mortgage-free property, a lender will consider your employment status and age when you apply for an unencumbered remortgage. Specific lenders may not give you a long-term mortgage if you’re close to retiring or on a pension but would be happier providing a short-term unencumbered mortgage over a five to fifteen-year term.
You must submit all current financial and personal documentation, like payslips or proof of earnings, outstanding loan particulars and documents, and any supporting information indicating your ability to make all your mortgage repayments.
Getting An Unencumbered Mortgage
When you apply for a mortgage on an unencumbered property, you’ll want to take specific steps to navigate the application process more efficiently. Consider doing the following:-
- Assess the amount you’d like to borrow and the reasons for doing so. Before you enter the process, you must have exact reasons for applying for the mortgage and a firm grasp of the amount you need. Generally, unencumbered mortgage lenders will request express reasons for your needing to raise funds on the unencumbered property.
- Most lenders are unlikely to entertain granting an unencumbered mortgage so you can pay your tax bill or invest in the stock market, for example. If you have a business reason for borrowing the money, make it a good one, like buy-to-let, as they traditionally frown upon applications for business purposes.
- Next, you’ll want to calculate your loan-to-value (LTV), which will massively impact a successful unencumbered mortgage application. Knowing the precise amount you wish to loan will allow you to calculate your LTV relatively accurately based on the market value of your home.
- To determine your home’s market value, speak to a local real estate agent or compare local sales of similar houses. There are also online valuation tools available for this purpose, so you should be able to get a rough estimate of your property’s value. Ultimately your lender’s valuation will be the one that counts, though.
- Having a rough idea of your property’s market value means you can get some idea about what amount will be available through an unencumbered mortgage. If you work on an LTV of below 65%, you can be confident that it would be acceptable to most lenders as long as you meet their other lending criteria.
- When an unencumbered mortgage application is involved, a specialist mortgage broker is a more than worthwhile addition to help with navigating the process if you decide to apply for an unencumbered mortgage on your mortgage-free property.
- An expert mortgage broker will know the most suitable specialist lenders to approach, an essential if you’ve inherited property or have other specialised circumstances. An experienced mortgage broker will also help you to connect with specialist lenders and deals you may not have otherwise found. In short, you’ll not regret speaking with a broker.
Unencumbered Mortgage Of An Inherited Property
It can be an arduous process to remortgage an unencumbered inherited property. You might want to mortgage the property to release equity, but this isn’t a simple process. Lenders often require you to have owned an unencumbered property for at least six months before they entertain a remortgage application.
Other problems can take the form of the involvement of other heirs or restrictions placed by an estate. There could be additional unforeseen charges and the transfer of ownership to consider. In inheritance-related situations, your solicitor will be required to represent you throughout the process and update you on the legal regulations and ramifications.
Loan Corp’s expert team is familiar with the intricacies of inherited unencumbered property mortgages and is ready to discuss your options.
Unencumbered Mortgage With Bad Credit
Should you have current bad credit issues or a poor credit history, you might have problems with an unencumbered remortgage application, as mortgage deals of all types pay close attention to adverse credit issues.
That said, bad credit does not mean you have no chance of getting a mortgage deal, mainly due to being mortgage-free and owning your property outright. There are certainly specialist lenders who can help, and visiting a mortgage broker who can put you in touch with a specialist lender who deals with adverse credit issues will be the best way to proceed.
If your credit history over the past five to six years is sound and your credit issues are over, you should qualify for a highly competitive mortgage deal from several lenders. The type of problems you faced could still impact your eligibility for a mortgage, with something like bankruptcy being especially severe.
Our advisors at Loan Corp can assist you with queries about your credit score, employment status, outstanding loans and unencumbered remortgages. If you’re looking for mortgage advice of any kind, feel free to contact us to get the input of our experienced professionals.
Unencumbered Mortgage For Investment
If you’ve purchased a property for cash, it is immediately unencumbered. If you want to move into the property or rent it for profit, then an unencumbered mortgage is a decent option. Many investors buy rundown properties with cash, then renovate and refurbish them to rent out to tenants.
The reason for the number of cash property purchases is that certain properties are in disrepair and considered non-mortgageable until investors carry out repairs. Cash purchases also require less time to complete than an average mortgage will.
After renovation or refurbishment, the investors have increased the property value and are at liberty to remortgage, which will release funds for further property investment and development.
Unencumbered Residential Mortgage
If your home is being lived in, even if it’s not in excellent condition, and you own the property outright, you should qualify for an unencumbered mortgage. Of course, the proviso is that you meet all the other lender criteria to qualify. However, if your property is uninhabitable, you could face problems getting a mortgage approved.
In this instance, you may first have to repair the problems and could utilise a bridging loan instead. If your bathroom and kitchen are problem areas, consider fixing them before considering a mortgage application. The conditions of these two rooms are the most important when lenders gauge the state of a property.
Interest Rates For An Unencumbered Mortgage
Your affordability and credit rating impact the interest rates you’ll be offered on any mortgage, and it’s also difficult to compare the interest on an existing mortgage to what you might receive for an unencumbered remortgage. As things currently stand, lenders should offer interest rates between 2.5% and 4.5% on unencumbered properties.
Mortgages with loan-to-value of 60% or less can expect the 2.5% interest rate offers. Several factors affect the interest rate a lender will offer, so you should consult an industry expert to receive an array of options to assist you in finding the right one suited to your financial and personal circumstances.
FAQs
Does unencumbered mean “no mortgage”?
An unencumbered asset is easier to sell or transfer than an asset with an encumbrance. Examples of unencumbered assets are mortgage-free properties, cars with paid-off finance and stocks bought in a cash account.
How can I purchase a second residence without selling mine first?
A bridging loan bridges the gap between two home loans and is often used to finance the new property purchase while your current property is on the market. Bridging loans can also finance building a home while you live in your current home.
Can I get a loan on an unencumbered home?
Mortgage loans are options for applicants that can offer unencumbered property as security for the loan or where there might be available equity in the property.
What’s the difference between unencumbered and encumbered?
The difference between unencumbered and encumbered assets amounts to whether there are any legal restrictions connected to them. Unencumbered assets are free from attached debts, while encumbered security is attached to some form of lien or debt.
Conclusion
We trust we’ve been able to assist you somewhat in understanding some of the intricacies involved in unencumbered mortgage options. We trust that this article has aided with answers to some of the questions you had before making a new financial commitment within the mortgage market.
If you’ve decided that a mortgage on an unencumbered property is how you’d like to proceed, please consider contacting us at Loan Corp before taking the final plunge. We are happy to clear up any lingering doubts or questions you might still have, as you should be one hundred per cent satisfied with your decision before moving forward.
Contact us at 0808 301 9509 or leave a message online, and we’ll get back to you within a few hours for an obligation-free chat.