An unencumbered mortgage is a form of mortgage secured on a property that you fully own. This situation may arise when you've cleared your existing mortgage entirely, purchased your property outright with cash, or inherited a property free from mortgage debt. When your property is free from any outstanding loans or charges, it is considered unencumbered. Should you wish to remortgage to access equity for home improvements or other purposes, having an unencumbered property strengthens your position. However, you'll still need to satisfy your lender's criteria for a new mortgage.
What is an Unencumbered Mortgage?
In the realm of mortgages, "unencumbered" refers to a property that is completely free of mortgages. When you own an unencumbered property, you possess 100% equity, having fully paid off any mortgage.
The term "encumbered" denotes something burdened or restricted, while "unencumbered" signifies freedom from such limitations. In property context, "unencumbered" denotes freedom from debt and financial obligations.
Opting for an unencumbered mortgage entails obtaining a loan on a property with no existing mortgage. This mortgage type allows you to unlock equity in your home by borrowing against its value. The released funds can then be utilised for various purposes like home repairs, debt settlement, or as a deposit on a second home, vacation property, or buy-to-let investment.
How do you Qualify for an Unencumbered Mortgage?
When applying for a mortgage on a property you fully own, the process is essentially similar to any other mortgage application. Initially, your lender conducts an affordability assessment, scrutinising your income, credit history, debt, and loan-to-value (LTV) ratio to ensure repayment feasibility.
Regarding LTV, it represents the mortgage size relative to your property's value. For instance, if you half paid of half your the LTV would be 75%. Typically, lower LTVs correlate with lower interest rates and a broader array of mortgage deals.
Your lender also considers factors like age and employment status for an unencumbered mortgage application. For example, if you're nearing retirement or already retired, some lenders might hesitate to offer long-term mortgages. In such cases, you might find shorter-term mortgage options, spanning five, ten, or fifteen years, more suitable than the standard 30 or 35-year terms.
Similar to your initial mortgage application, you'll need to compile up-to-date personal and financial documents, including proof of earnings, information on outstanding loans, and any relevant documents demonstrating your ability to afford monthly payments.
Unencumbered Mortgage: is it a New Mortgage or a Remortgage?
Unencumbered homeowners typically enjoy a favourable position when considering remortgaging.
However, are you truly remortgaging? Technically, a remortgage involves replacing an existing mortgage deal with a new one. Since your property is mortgage-free, obtaining an unencumbered mortgage doesn't fit the strict definition of remortgaging.
Nevertheless, some lenders may refer to it as an unencumbered remortgage, while others treat it as a new property purchase. Despite potential terminology discrepancies, rest assured that you'll have ample deals to choose from, and the process remains largely consistent regardless of your lender's classification.
To navigate through any confusion surrounding jargon and terms, consider enlisting the assistance of a mortgage broker, such as Nesto. Start your journey here, and let us handle the legwork on your behalf.
Is an Unencumbered Mortgage Right for me?
If you possess a mortgage-free property, you likely stand in a strong financial position. This means you're not burdened by monthly mortgage repayments, which typically constitute a significant expense for many individuals. Additionally, you possess an asset that can serve as collateral for borrowing purposes.
Considering a mortgage on your unencumbered property to release cash for DIY projects or property investments could prove beneficial, contingent upon your circumstances.
Before pursuing an unencumbered mortgage, reflect on the following:
1. How stable is your current financial situation? Acquiring a new mortgage introduces a substantial monthly expense, inclusive of fees and interest. Are you financially prepared to accommodate this additional expenditure? And could you sustain it in the event of a change in circumstances?
2. Does obtaining a mortgage align with your current goals? In essence, why do you seek to borrow against your property, and what are your intended uses for the funds? Would obtaining a personal loan be a more suitable option, particularly if your objective is home improvements?
3. Lastly, understand the associated risks. While outright homeownership is desirable, mortgaging your property poses a potential risk. Failure to meet repayment obligations could jeopardise your home ownership status, potentially leading to repossession.
Can I remortgage my unencumbered property with bad credit?
Securing an unencumbered mortgage with bad credit mirrors the challenges of applying for a standard mortgage or remortgage, albeit with some added complexity. Yet, it's not an insurmountable task.
If the factors contributing to your low credit score are minor or date back further in time (such as a missed mobile phone bill from five years ago), you still have a reasonable chance of approval.
Conversely, severe credit issues like bankruptcy, repossession, and County Court Judgements (CCJs) on your record can significantly restrict your choice of lenders. Moreover, any available mortgage deals may be accompanied by exorbitant interest rates.
The reassuring aspect is that there are measures you can take to enhance your credit score. Additionally, collaborating with a broker, such as Nesto, can prove invaluable in identifying the most suitable lenders and deals tailored to your circumstances.
Key Takeaways:
- Unencumbered describes a mortgage-free property in which you own 100% of the equity in the house.
- To take out a mortgage on an unencumbered property, you still need to pass lenders checks such as affordability.
- Some lenders will call it a remortgage, others will call it a mortgage, however they are both referring to the same product.
- You can get an unencumbered mortgage with bad credit, however it will dependant on your credit history.
