Unencumbered Mortgages

If you own your home outright, an unencumbered mortgage can be a smart way to release equity tied up in your property to fund home improvements, buy another property, or consolidate unsecured debts.

In this guide, we’ll break down everything you need to know about unencumbered mortgages, including how they work, how they compare to remortgaging, and what alternative options might be worth considering to help you decide if it’s the right option for you.

How Does an Unencumbered Mortgage Work?

An unencumbered mortgage is a home loan taken out on a property that’s owned outright, meaning there’s no existing mortgage or debt secured against it.

Even though you don’t currently have a mortgage, you can apply for one as if you were buying a home for the first time. A lender will assess your income, credit history, and the value of your property before approving a loan amount. The mortgage is then secured against your home, and you’ll make monthly repayments just like a standard mortgage.

The amount you can borrow depends on the loan-to-value (LTV) ratio, which is the percentage of your property’s value a lender is willing to loan. If your home is worth £200,000 and a lender offers a 75% LTV, you could borrow up to £150,000. The lower the LTV, the better the interest rates you’ll likely be offered.

Remortgage Vs. Unencumbered Mortgage

Both options allow homeowners to borrow against their property’s value, but there’s a key difference:

• Remortgage: This is when you switch your existing mortgage to a new deal, either with your current lender or a new one. It’s often done to secure a better rate or to borrow additional funds by releasing equity.

• Unencumbered Mortgage: This is a new mortgage taken out on a property that has no existing mortgage or financial liabilities. Some lenders may refer to it as a “remortgage,” but technically, it’s a brand-new loan rather than replacing an old one.

The application process for an unencumbered mortgage can also be simpler (and quicker to process) than a remortgage because there’s no need to pay off an existing loan. 

Why Use an Unencumbered Mortgage?

There are plenty of valid reasons why someone might take out a mortgage on a property they already own, such as:

• Home improvements: If you want to renovate your property, an unencumbered mortgage can be a cost-effective way to fund your plans.

• Buying another property: You could use the equity to purchase a second home, an investment property, or help a family member onto the property ladder.

• Debt consolidation: If you have multiple loans or credit card debts, consolidating them into one mortgage payment could lower your overall interest rate and simplify repayments.

• Releasing cash for personal use: Some people use an unencumbered mortgage to fund major expenses like a wedding, university fees, or starting a business.

How Do You Qualify?

Since you already own the property outright, you’re in a healthy position when applying for an unencumbered mortgage. However, lenders will still assess your application based on factors such as:

• Income and affordability: As a general rule of thumb, the amount you can borrow is typically capped by most mortgage lenders at between 4 and 4.5 times your annual salary.

• Credit history: A strong credit score will help you qualify for the most competitive mortgage deals, but specialist lenders will still consider your application even with any bad credit issues registered on your record.

• Property value: The higher your home’s value, the more you may be able to borrow, but lenders will cap the loan amount based on LTV limits (usually up to a maximum of 95% LTV).

• Employment status: Full-time employees, self-employed individuals, and retirees can all qualify, but self-employed applicants may need to provide more documentation to prove income stability (typically the last 2-3 years of certified accounts).

Most lenders don’t require a deposit for an unencumbered mortgage since your property already acts as security. However, a lower LTV usually means better interest rates.

What Are the Pros and Cons?

Before applying, it’s essential to weigh up the benefits and drawbacks for this type of home loan.

Why They’re a Great Idea:

• Access to lump-sum cash: You can unlock the value in your home without selling it.

• Potentially lower interest rates: Some lenders offer competitive deals for unencumbered properties.

• Flexible use of funds: You can use the money however you choose, from home improvements to investments.

• Better borrowing position: Without an existing mortgage, you should have access to more lenders and deals.

What to Think About:

• Taking on new debt: You’ll be committing to regular mortgage repayments, which can impact your finances.

• Interest costs: Over time, you’ll pay interest on the borrowed amount, increasing the total cost of the loan.

• Risk of repossession: If you’re unable to meet repayments, your home could be at risk.

• Possible fees: Some lenders charge arrangement fees, valuation fees, and other costs, which should be factored into your decision.

What Are the Alternative Options?

If an unencumbered mortgage isn’t right for you, there are other ways to access funds tied up in your home, including:

• Equity release* (Lifetime Mortgage): Aimed at older homeowners (55+), this allows you to access cash from your property without having to make monthly repayments.

• Personal loan: If you only need to borrow a relatively small amount (£15,000 - £20,000), an unsecured personal loan might be a better option. Interest rates may be higher but the overall cost should work out lower.

• Downsizing: Selling your home and moving to a cheaper property could free up cash without taking on new borrowing.

*This service can be offered by referral to a third party