Owning an unencumbered property means owning a property outright, it’s a mortgage free property and therefore not hindered by loans or potential collateral claims against your assets, known as liens. By having no outstanding debt on the property, you have “full equity”. This means you’d be entitled to all the proceeds of a sale, a significant financial asset.
So, can you remortgage this property? The answer is yes. This article will explore in depth the reasons why you might want an unencumbered remortgage, what it involves, and the benefits and potential risks involved in making this decision.
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The Process Of Remortgaging An Unencumbered Property
Mortgaging a mortgage-free property is called an unencumbered mortgage. Here’s how you access an unencumbered mortgage at your property.
- Property Valuation – The first step in the mortgage application process to getting an unencumbered mortgage is a property valuation. Lenders require a professional assessment of your property to find the market value.
- Choosing Lender – Now you need to choose a lender. Options for a lender for an unencumbered remortgage include banks, building societies, or specialist finance. This is easily the hardest part, as mortgage lenders have different terms and often throw up a variety of factors. Some of these include interest rates, fees, reputation, customer service, and lastly – the fine print.
- (Optional) Find a Quality Mortgage Broker – Mortgage Brokers are full-time mortgage experts. Here at When the Bank Says No, we have access to different lenders and are not limited to high street banks so we can always find the right mortgage deal. We have relationships with specialist lenders and can compare and select the best deals on the market.
- Legal Process – The legal process includes legal checks and the preparation of mortgage documentation. A solicitor/conveyancer usually handles this part of the process, ensuring all legal aspects are accounted for so you will have to pay legal fees.
Reasons to Get an Unencumbered Mortgage
There are several reasons to consider an unencumbered mortgage. These can be:
- Raising Capital for Investments – One of the main reasons for remortgaging is to release capital for investments elsewhere. If you want to effectively release equity, this doesn’t necessarily have to be for the property itself, but for any number of things, such as investing in businesses or other real estate. If you have an inherited property, then you may want to keep the house but still be able to benefit from the funds an unencumbered mortgage could offer.
- Home Improvements – Getting an unencumbered mortgage simply to improve your property is very common. This can be a practical way to enhance the living space and increase the property’s value or make modifications so older people can stay in the family home during their later years. Renovations could include anything from energy efficiency solutions, such as insulation measures, to building extensions and conservatories.
- Debt Consolidation – An unencumbered mortgage can be an effective tool for consolidating your debts. Debts such as credit cards, personal loans, car loans, in fact all your outstanding loans, can be repaid and you’ll benefit from potentially lower interest rates and consolidated monthly repayments.
- Others – There are lots of other reasons to remortgage a mortgage-free property including providing finance for a wedding, supporting family members, or educational expenses – we have seen many clients remortgage for these reasons.
Advantages of Remortgaging an Unencumbered Property
If you’re looking for a mortgage on an unencumbered home, you will find that there are several possible advantages.
Lower Interest Rates
Standard mortgages often have fairly high interest rates. However, if you own your house outright, you will gain access to lower interest rates on an unencumbered remortgage due to the equity in your property. You’ll also be considered much lower risk by most lenders due to your proven ability to pay back large sums of money.
These interest rates may be reduced even further if you’ve managed to keep your credit rating high. Paying outstanding debts, or making payments on a contract improves your credit score and avoids a bad credit record. Off the back of a huge debt like a mortgage being paid off, your credit score is likely to be excellent and put you in a strong financial position, making you look like an excellent repayment option for lenders.
Flexibility
Remortgaging allows you much more control over the contract, for example, the length of the contract; you can tweak the mortgage duration to suit you best on a remortgage. The length of the term is important because it dictates how much the monthly mortgage repayments are. You pay more in the long run for more extended durations than you do for shorter ones, allowing you to plan your financial obligations with precision accuracy.
Another thing to consider is the possibility of overpayment. Some remortgaging deals offer the ability to pay more than the scheduled monthly amount when you have the financial capacity to do so. This will allow you to pay off the mortgage balance faster, and also reduces some of the interest. However, some mortgage deals can come with limitations or penalties so it’s essential to find the right product to suit your financial plans.
Payment holidays may be available on some remortgage deals. This means you will be given a period where you no longer need to make mortgage payments. This can be helpful if you find yourself in need of financial relief or have taken on a new financial commitment.
Tax Advantages
There are several occasions where if you own the home outright, a remortgage may benefit you in terms of taxes. For example, if you use your remortgage funds for an investment such as a business, or another property, you could potentially reduce the taxable income by the amount of interest paid. The reason for this is simple: the interest expense is considered a cost of generating investment income.
However, tax laws are very complex and vary depending on where you are, as well as your personal circumstances and status. It’s essential to work with a taxation expert. When the Bank Says No are expert mortgage brokers who not only understand the specific areas and circumstances in which you can benefit from tax deductions, but can find the best remortgage deals on the market. And if a residential remortgage is not the best vehicle for your plans, then we’ll tell you and help you find an alternative.
Improved Cash Flow
Lower monthly payments due to low-interest rates means that you’ll have more money in hand and greater financial freedom. The flexibility of your mortgage also means that you can save yourself from missing payments by changing the terms or taking a break, giving you greater flexibility.
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Conclusion
Owning a property outright with no existing mortgage then remortgaging and using the bulk of the money for investments is a common strategy amongst homeowners that can do it. However, to get the best out of what, for many people, is a once-in-a-lifetime opportunity, we recommend you approach a specialist mortgage broker or mortgage adviser to get the right long-term contract for you.
Unencumbered Mortgages – FAQs
I Own My House Outright: Can I Remortgage?
If you have an unencumbered property or a mortgage free home then you can take out a new mortgage deal subject to the lender’s eligibility criteria which includes factors like your employment status, and a financially stable history free from any serious credit issues.
Can I Apply For a Remortgage With A Bad Credit History?
Remortgaging or getting an unencumbered mortgage with a poor credit history is possible, but it usually comes with more caveats. The first problem you might encounter is that mainstream lenders won’t consider you for a mortgage loan. If you overcome that problem (and, as our name suggests, that’s very challenging, but possible with the right help), you may be hit with higher mortgage rates. Specialist lenders may be your only option and it’s usually only mortgage brokers like us that have access to lenders like these. However, if you own your property outright so you’re looking for a mortgage on an unencumbered property, then the lure of all that equity will definitely work in your favour if you have an adverse credit rating.
What Is The Difference Between Remortgaging And A Second Charge Mortgage?
Remortgaging is simply replacing your existing mortgage with another one. You can remortgage an existing property that you’ve paid off, or simply remortgage by changing lender. The purpose of a remortgage is often raising funds for home improvements, getting a better deal or consolidating all of your debts into one. It often involves getting a new interest rate, changing the term length, and possibly lower monthly repayments. A second charge mortgage (also called a secured loan), is another mortgage on the same property. It is secondary to the primary mortgage. If you default, the original mortgage is paid off first from the proceeds of any house sale.. The point of a second charge mortgage is simple; it’s used when the borrower needs additional funds but doesn’t want to, or can’t, remortgage the loan they already have. For a lender, a second charge mortgage carries a higher risk so borrowing for secondary mortgages is usually more expensive.
What Is An Affordability Assessment On An Unencumbered Mortgage?
This refers to a process where the lender evaluates your ability to afford new mortgage repayments based on your other financial obligations. Your income sources are reviewed (usually by looking at your payslips and bank statements) to ensure you have a steady income that will reliably cover mortgage payments. Income can include wages from both traditional and non-traditional (self-employment, contractual) work. A lender will assess your budgeting habits, as well as any outstanding debts. It gives them an idea of your outgoings each month, and how much capacity and leeway you have to pay the mortgage. They will consider your financial stability and include things like your savings, investment income and spending habits. Finally, credit scores are often assessed to see just how good you are at meeting your obligations.
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What Is The Maximum Age For An Unencumbered Mortgage?
Unencumbered Mortgage lenders each have different maximum age requirements. Here are some averages. The typical upper age limits seem to be 80-95 years old. That being said, some lenders don’t have an upper age limit at all. It’s important to note that the age limit usually refers not to the borrower’s age at application, but the age they will be by the time they’ve paid off their debt. For instance, some lenders will accept applications from borrowers as old as 80, but want the borrowed amount repaid by the age of 85.