When there is no mortgage on a property – you have repaid any mortgage and own your home outright – it is said to be mortgage-free. The technical term for such a mortgage-free property is an “unencumbered” property – it is unencumbered by any mortgage, loan, charge, or other financial restriction.
Why mortgage an unencumbered property?
If you own your home outright, there is valuable equity locked up in its market value. You might want to release some of this potential to raise extra cash – for any number of reasons, but these might include and are not limited to:
- the funds to renovate, extend or improve your home;
- you plan to move home but want the funds to keep the existing property to let out to tenants; or
- to invest in other property;
To raise those funds, you have the option of remortgaging your current home. Strictly speaking, of course, a remortgage is the replacement of one mortgage by another one. In this case, however, you have already paid off your mortgage, and your home is mortgage-free. Lenders are still likely to refer to your raising the desired funds through a remortgage – as a new mortgage on your mortgage-free property, or a remortgage of a freehold property.
The TSB, for example, explicitly treats loans on mortgage-free properties as remortgages – with a maximum 80% loan to value (LTV) ratio.
Can I get a mortgage on a mortgage-free property?
The very fact that you are the outright owner of a mortgage-free or unencumbered property immediately puts you in a strong position as far as raising a mortgage loan is concerned.
Whether you bought that property with cash, without the need for a mortgage, or you have already paid off an outstanding mortgage, it shows that you are financially responsible and stable.
Although you may be off to a head start, however, the remortgage of a freehold property is effectively a new mortgage, and any lender will need to conduct the appropriate assessment as to the affordability of the new loan for you.
You have demonstrated a basic level of financial responsibility through owning a mortgage-free property. Still, now the lender needs to assess the affordability of the remortgage in terms of your ongoing income, outgoings, existing debts and loans, the value of the property to be remortgaged, and the loan to value (LTV) the lender may be prepared to offer.
The lender and the reasons for your remortgage
Any lender is also going to consider your reasons for remortgaging. There may be any number of reasons as we discussed above. Whatever your reasons, the lender will want to be reassured that they make financial sense:
- for the purchase of a new car or holiday, for example, a lender may wish to reassurance as to the affordability of such non-essential expenditure;
- if the remortgage is for the extension or improvement of your home, the lender may want to know the estimated capital appreciation likely to result from the works and to be reassured that the property is already entirely habitable – uninhabitable properties may not qualify for a remortgage; or
- if you intend to invest in buy to let property, the lender may be interested in discovering the expected rental yield – which, in turn, helps to determine the affordability of any remortgage of your unencumbered property.
Any remortgage lender also needs to consider the financial standing revealed by your credit history. A less than perfect credit rating is unlikely to be a significant barrier to obtaining a mortgage – but the older any credit issues, the better and relatively minor infractions, such as defaults or late payments, are of course, less serious than re-possessions or bankruptcies.
Register your mortgage-free property
Although it is not immediately related to the possibility of raising a remortgage on an unencumbered property, you might nevertheless want to ensure that your mortgage-free home is registered with the Land Registry Property Alert Service.
Registration ensures that you are notified of any attempt to modify or alter the ownership of the property – risks that have risen through attempts to defraud property owners of substantial sums, according to a report by Today’s Conveyancer.
Finding the most appropriate mortgage-free property remortgage
As you are in a good position in terms of having a mortgage-free home that you wish to borrow upon, you may find that a specialist mortgage broker can highlight those deals that are the most competitively priced for your situation. You can then rest assured that you have the most appropriate remortgage solution for you.
Can I remortgage if I own my house outright?
Yes, provided that you meet all of the criteria set out below. The main difference between this type of remortgage and other types of remortgage is that there is no requirement for you to have a mortgage on the property being remortgaged.
What is a mortgage-free property remortgage?
A mortgage-free property remortgage is when you take out a mortgage on your mortgage-free property. This means that you borrow money against the equity in your property instead of taking out a loan against your current mortgage. If you do decide to take out a mortgage, it must be paid off before the end of your term (usually 25 years) and you cannot extend the term beyond 30 years. For example, if you have a loan for 25 years with 2% interest rates, your monthly repayment amount would be £423.85.
Can I remortgage my home?
If you have owned your home for at least three months, you should be able to remortgage it without any problems. However, you will need to check whether you have enough equity in your property to cover the cost of the mortgage and you can afford monthly repayments.
Can I remortgage if I’m self employed or freelance?
You can remortgage your home even if you are self-employed or working as a freelancer. There are some restrictions though: you must earn more than £25,000 per year, you must have been earning this income for at least two years and you must be paying tax each year. Mortgage lenders will look for your affordability to pay the mortgage payments on time as a sole trader, self-employed or freelancer.
Can I use a bridging finance scheme to remortgage?
Yes, although you will still need to pay off the existing mortgage first. Bridging finance schemes are designed to help people who have just moved into their new home and don’t yet have sufficient funds available to make their mortgage payments. They allow you to borrow up to 90 days’ worth of your rent from your landlord. Once you’ve made your final payment to your old lender, you’ll have the option of either repaying the bridging finance over a period of 12 months or leaving it outstanding until your next rental agreement begins.
Can I remortgage if I have negative equity?
Negative equity occurs when the value of your property has fallen below what you owe on your mortgage. Negative equity usually arises because you borrowed too much money on your property, so you are now unable to sell it for enough money to clear the debt.
Can I remortgage with the same lender?
No, you will need to find another lender. It’s important to choose a different lender as they may charge higher fees and charges. You could also consider using an independent mortgage broker to help you find the best deal for your mortgage application.
Can I remortgage during a fixed term?
Yes, but only if you want to switch to a variable rate mortgage. A fixed rate mortgage is one where the interest rate remains the same throughout the life of the mortgage. Variable mortgages change depending on market conditions, which means they can go up or down.
Can I remortgage when I’m over or retired?
Yes, there are no age limits when it comes to remortgaging. The main thing to bear in mind is that you will need to show that you can afford the monthly payments.
How does an unencumbered mortgage work?
An unencumbered mortgage allows you to borrow less than the full amount of your property. Instead of borrowing 100% of the value of your home, you can borrow 80%, 75%, 70%, 65%, 60%, 55%, 50%, 45%, 40%, 35%, 30%, 25%, 20%, 15%, 10%, 5% or 0%. This way, you can reduce the amount you need to borrow and save yourself thousands of pounds in interest payments on a residential remortgage.
Is getting an unencumbered mortgage hard?
Not really. If you’re looking to remortgage to buy a house, then you should already know how much you can borrow. So, all you need to do is compare the cost of buying your current property with the cost of buying a similar property with an unencumbered mortgage.
Why would someone remortgage a house they own outright?
If you own your home freehold, then you can’t take out any other loans against it. However, you can remortgage your property without having to pay stamp duty. This is because you are not selling anything; instead, you are simply changing the type of loan you are taking out. For example, if you were paying a £100,000 mortgage on a property worth £150,000, you could remortgage this for a £50,000 mortgage, saving around £10,000 per year in interest repayments.
What happens if my property goes up in value?
You won’t be able to increase the size of your mortgage by more than 10% of the original purchase price each time you remortgage. Therefore, if your property increases in value from £150,000 to £200,000, you can only increase your mortgage by £20,000 (£100,000 x 1.1).
Can I get a better mortgage deal if I own my house outright?
Yes, you can. There are many lenders who offer special deals for people who have bought their property freehold. These include:
- Lenders offer a discounted rate on the first few years of the new mortgage.
- Lenders offering a discount off the interest rates for the first two years of the new mortgage (this is known as a 2/3 year fix).
- Lenders offer a lower rate of interest for the first three years of the new mortgage compared to what you currently pay.
What do lenders look at when deciding whether to approve an unencumbered mortgage?
The key things they look at are:
Your income – You’ll need to provide proof of income so they can confirm that you can afford the payments. They also check your credit rating to make sure you’re not going into debt.
Your deposit – Lenders want to see a minimum deposit of 10% of the total amount borrowed.
Your credit score – A good credit score means that you’ve paid back debts in the past. It’s important that you don’t carry too many credit cards or charge purchases on them before applying for a mortgage.
Your affordability – The lender will assess whether you can afford to pay the monthly instalment on the new mortgage. To do this, they’ll calculate the difference between the amount you owe on your existing mortgage and the amount you’d pay on a new one. If you can comfortably cover these costs, then you’re likely to qualify for an unencumbered mortgage.
Can I get a buy to let mortgage against an unencumbered home?
No. Buy-to-Let mortgages are available for those wanting to invest in rental properties. However, there are restrictions on how much you can borrow against your property. In particular, you cannot use the equity in your home to fund a buy-to-let mortgage. Instead, you must use money from another source, such as savings or a personal loan.
How long does it usually take to process my application?
It depends on which bank you apply with. Some banks can process applications within minutes while others may take several days. Once you submit your application, you should receive a decision within 72 hours.
Where can I get a good deal for an unencumbered mortgage?
There are some great deals for unencumbered mortgages available through specialist brokers. If you search online, you can find plenty of offers from companies like Moneyfacts.co.uk, Mortgage Express and Mortgages Direct.
Can I remortgage an unencumbered property if I’m retired?
If you’re retired, you may be eligible for a pensioner mortgage. This allows you to remortgage without having to sell your home. Your lender will need to verify that you’re receiving a state pension but you can still access up to 80% of the value of your home as a lump sum payment.
Can I get an unencumbered mortgage if I’m self-employed or freelance?
Yes. Self-employed people can often benefit from an unencumbered mortgage because they have more flexibility over their finances. For example, you could choose to work part-time rather than full time. This would allow you to keep your current salary level while saving enough to repay the mortgage.
What is an unencumbered mortgage worth?
Unencumbered mortgages can cost anything from £2,000 to £10,000 per month depending on where you live and what type of property you own.
Can I get an unencumbered mortgage if I’m on furlough?
Yes. Furloughed homeowners can also benefit from an unencumbered mortgage. You won’t lose any income during your period of unemployment but you may not earn as much as usual. As a result, you might struggle to make payments on your mortgage each month.
My mortgage is almost paid off can I remortgage?
You can remortgage once your mortgage has been fully repaid. However, you’ll need to provide evidence that you’ve done so. Your lender will want to see proof that you’ve repaid all outstanding amounts including interest charges.
Can I get an unencumbered mortgage with a bad credit history?
Yes. Many lenders offer mortgages to applicants with bad credit histories. They’ll typically ask for additional security such as a deposit or guarantor. However, many borrowers who have had problems with their credit rating have found ways to secure financing. It’s always better to contact an expert broker instead of going directly to mortgage lenders.
Can I buy a property with cash?
Yes. There are different types of loans available for those looking to purchase a house using only cash. The most common option is a ‘buy to let’ mortgage. These loans allow you to borrow money to buy a rental property. You then rent out the rental property in return for a monthly income. The loan is secured against the rental property itself.