Unencumbered Mortgage

Despite rising mortgage rates, remortgaging is one of the best ways of raising capital for various purposes, such as home repairs and renovations. 

And if you own 100% of the equity in the property, the process may become more simple.

Lenders are more likely to be willing to provide loans against a property with no outstanding charges, or in other words, an unencumbered property due to the potentially low LTV.  

Read on to learn more about an unencumbered mortgage.

What Is Unencumbered Mortgage?

An unencumbered mortgage is a loan that is taken out on a property over which you have complete ownership. This means there are no outstanding charges to be paid, and the property cannot be legally claimed by anyone else which would be the case if a mortgage or other finance were raised against it.

Such mortgages are taken for the purpose of releasing a certain amount of equity in the property by borrowing against the property value. 

The equity released can then be used for different purposes, such as making home improvements or repairs, paying off debts, or as a deposit for a second home.

Compared to other types of loans, getting an unencumbered mortgage can be fairly simple since there are no charges or loans against the property. 

As mentioned the positive for lenders is the potentially low LTV unless you are looking to capital raise a large amount which will then take the unencumbered remortgage up to a high proportion of the properties value. 

Benefits Of An Unencumbered Mortgage

1. Flexibility

An unencumbered can be incredibly flexible and can be used for several purposes. These can include purchasing a large asset, such as a car, making home improvements, or something else. Different lenders will have different criteria on the purpose behind why you can raise the funds. 

2. Lower Interest Rates

In many cases, the interest rates on such mortgages tend to be lower than on other loans. This means the monthly payments are smaller, making the loan more affordable. This is because as mentioned the potentially lower LTV ratio. 

3. Access To Additional Funds

Depending on factors such as credit profile and affordability, an unencumbered mortgage may allow access to additional funds than would be possible through credit cards and personal loans. 

How To Qualify for An Unencumbered Mortgage

The qualifying requirements for unencumbered mortgages are the same as those of other mortgages. 

So, lenders undertake a standard affordability assessment, which involves conducting investigations into your debt and credit history, income, and loan-to-value (LTV). 

They may also want to know whether the property being remortgaged is used for investment or residential purposes. 

Employment status and age are other factors that are considered, as lenders may not be very willing to offer long-term loans to people close to their retirement age or older. 

To provide information to the lender when applying for the remortgage, you will require various documents, such as those related to financial and personal information. This may include proof of earnings, documents related to debts and loans, etc. 

What Can An Unencumbered Mortgage Be Used For?

An unencumbered mortgage or remortgage can be used for a wide variety of purposes, such as:

• Arranging for funds to purchase a buy-to-let property
• Arranging for finances for a large purchase, such as a car
• Home improvements and renovations
• Acquiring capital for a new business (lender dependant)
• Deposit for a new home or vacation home
• Consolidating or paying off other debts

This is not an exhaustive list, and an unencumbered mortgage can be used for other purposes as well. Lenders will have in there criteria the purpose in which funds can be used. 

Is An Unencumbered Mortgage A Remortgage Or A New Loan?

When it comes to remortgages, a person with an unencumbered home tends to be in a strong position and can take advantage of favourable loan terms and rates. 

However, it can be confusing to determine whether an unencumbered mortgage is a fresh loan or a remortgage.

The reason is that, by definition, an unencumbered property is one which is free of all mortgages and outstanding charges. So, taking out a mortgage on such a property would not technically be a remortgage. 

That said, some lenders call this type of mortgage an unencumbered remortgage, while others consider it a new loan. 

In either case, the process of applying for the loan is the same, irrespective of how the lender treats the mortgage.

And since the risk for the lender can be minimal in this type of loan, there are numerous options to choose from. When applying it is important to put the correct application type based on how the lender sees it, so a purchase or remortgage. 

Factors To Consider When Applying For An Unencumbered Mortgage

If you have unencumbered property and need to arrange for some funds, an unencumbered mortgage might be an excellent option. 

However, before applying for such a loan, it is vital to consider various factors, such as:

1. Current Financial Situation

The first thing to consider is your financial situation, as a mortgage will result in a significant monthly expense for a certain period. 

On top of that, fees and interest on the loan will need to be paid. So, you should be able to handle such expenses for the loan period. 

2. Reason For Taking The Mortgage

Think about the reason why you are taking out such a loan and whether an alternative might be better suited for the purpose. 

For instance, a personal loan might be a good option if you just need to complete some home repairs. 

3. Risk Involved

Being the owner of an unencumbered property can put you in a financially strong position. However, taking out a mortgage on such property can put that at risk. 

If the loan is unpaid due to any reason, the lender might take possession of the property, which is another factor to consider. 

Getting An Unencumbered Mortgage

The first thing you need to do to get an unencumbered mortgage is to calculate the value of the property, which will help determine the equity that can be released. 

Then, consider the purpose for which the loan is required, such as a car purchase or home repairs. 

Doing so will help you calculate how much money is required. And different lenders may offer more favourable interest rates and loan terms depending on the purpose for which the mortgage is to be taken.  

Finally, consult an expert broker who can provide assistance and make the process a lot simpler. They can help locate the right lender, ensuring you get the best deals on the market. 

FAQs

1. Can you get an unencumbered mortgage with bad credit?

Having bad credit can make getting an unencumbered mortgage difficult, but it is still possible. That said, serious issues resulting in bad credit can limit the number of lenders willing to provide a loan. 

2. Is it possible to get an unencumbered mortgage on an inherited property?

You can get an unencumbered mortgage on an inherited property, but the process is not very straightforward due to reasons like various charges on the estate or some lenders requiring probate to already be granted.

In such situations, lenders specialising in unencumbered mortgages can help you out and brokers who have experience in this area.. 

Final Thoughts 

An unencumbered mortgage is an ideal solution for those who own property without outstanding debts. It is also beneficial for lenders since the risk involved can be low, which is why many lenders are willing to provide such loans. 

However, when applying for such loans, you still need to meet certain criteria, such as affordability and financial stability. In addition, it is crucial to consider factors like the risk involved and the purpose of the mortgage before selecting this option.

That is why hiring a mortgage expert when planning to take out an unencumbered mortgage is highly recommended. Such experts have complete knowledge of the mortgage market and can guide you to the most suitable lenders offering the best deals. 

Your home may be repossessed if you do not keep up repayments on your mortgage.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.