A quick guide to getting an unencumbered mortgage

An unencumbered mortgage is a type of mortgage that you take out on a property that you own outright. This could be because you’ve paid off your existing mortgage in full, you bought your home with cash, or you inherited a mortgage-free property. 

When your property no longer has any outstanding loans or charges against it, it’s unencumbered. If you wanted to remortgage, and release some of the equity for home improvements or something else, being unencumbered puts you in a strong position. You’ll still need to meet your lender’s criteria for a new mortgage though.

In this article, we explain everything you need to know about unencumbered mortgages, including how to qualify for one and how to decide whether it’s the right option for you. 

What is an unencumbered mortgage?

In the world of mortgages, “unencumbered” describes a mortgage-free property. If you own an unencumbered property, you own 100% of the equity. You’ve paid off your whole mortgage.

Where does this word come from? Well, “encumbered” means that something is burdened or restricted. And “unencumbered” means it’s free from restrictions. When it comes to property,  “unencumbered” means that it’s free from debt and other financial liabilities. 

If you’re looking to take out an unencumbered mortgage, that’s a mortgage you’d take out on a home with no mortgage to pay.

An unencumbered mortgages lets you release some of the equity in your home as cash by borrowing against the value of your property. You can then use that money to fund home repairs or improvements, pay off debts, or as a deposit on a second home, holiday home, or buy-to-let investment. 

How do I qualify for an unencumbered mortgage?

Applying for a mortgage on a property you own outright is basically the same as any other mortgage application. Your lender will start by carrying out an affordability assessment. This means they’ll check your income, credit history, debt, and loan to value (LTV) to make sure you can pay back the loan. 

A note on LTV. LTV is the size of the mortgage compared to your property’s value. So, if your home is worth £200k and you want to borrow £150k, the LTV would be 75%. In general, the lower the LTV, the lower the interest rate and the wider your choice of deals for your mortgage. 

Your lender also takes your age and employment status into account when you apply for an unencumbered mortgage. For instance, if you’re nearing retirement age (or you’re already retired), some lenders can be reluctant to give you a long-term mortgage. In this situation, you might benefit from a short-term mortgage paid back over five, ten, or fifteen years, rather than a 30 or 35-year mortgage term. 

Just like the first time you got a mortgage, you’ll also need to pull together up-to-date personal and financial information – proof of your earnings, documents related to outstanding loans, and anything else that might help to prove that you can afford the monthly payments. 

Here’s a quick refresher of everything you need for a mortgage application.

Unencumbered mortgage lenders: is it a new mortgage or a remortgage?

Unencumbered homeowners tend to be in a healthy position when it comes to remortgaging. 

But are you actually remortgaging? Strictly speaking, a remortgage replaces an existing mortgage deal with a new one. Because your property doesn’t have a mortgage, you’re not technically remortgaging it when you take out an unencumbered mortgage. 

Still, some lenders will call it an unencumbered remortgage, while others treat it as a brand new property purchase. Don’t let this confuse you. You’ll still have plenty of deals to choose from and the process is largely the same, whatever your lender chooses to call it.

A mortgage broker, like Habito, can help you navigate the jargon and terminology to find the best deal for you. Get started here, and let us take care of the work on your behalf. 

Is an unencumbered mortgage right for me? Three things to consider

If you own a mortgage-free property, you’re probably in a strong financial position. It means that you’re not paying monthly mortgage repayments (usually the largest monthly spend for most people). It also means you have an asset that you can use as security to borrow against. 

So, taking out a mortgage on your unencumbered home to release cash and fund DIY projects or property investments could be a smart move – but it all depends on your circumstances. 

Before you apply for an unencumbered mortgage, think about the following: 

  1. How secure is your current financial situation? Taking on a new mortgage means a new, large monthly expense, with fees and interest thrown in for good measure. Can you comfortably afford this extra spending? And could you continue to afford it if your situation changed?

  2. Does taking out a mortgage make sense right now? In other words, why do you want to borrow against your property? What are you going to do with the money? Would it make more sense to take out a personal loan instead, especially if your goal is to do some home improvements?

    A mortgage broker can help you figure out the short and long-term implications of remortgaging and whether it makes sense for you. 
  1. Do you understand the risk involved? Owning your home outright is an enviable position to be in. Taking out a mortgage against it could put that at serious risk. If you fail to keep up with the repayments, you could lose your home altogether.

Can I remortgage my unencumbered property with bad credit?

Just like applying for a standard mortgage or remortgage, trying to get an unencumbered mortgage with bad credit can make things a bit trickier. However, it’s not impossible.

If the issues pulling down your credit score are smaller or older (a missed mobile phone bill from five years ago, for example), you should still stand a good chance of approval. 

On the other hand, serious credit issues like bankruptcy, repossession, and County Court Judgements (CCJs) on your record can limit your choice of lenders, while any available mortgage deals will come with sky-high interest rates. 

The good news is, there are things you can do to improve your credit score. And if you work with a broker (like Habito), they can help you find the best lenders – and deals – for your situation.

Can I find an unencumbered mortgage deal with Habito?

Yes, you can! As a whole of the market mortgage broker, we have access to over 20,000 mortgages from over 90 lenders. This includes specialist lenders and deals you won’t normally get to see. Leave it to us and we’ll find you the perfect unencumbered mortgage. 

Get started today, for free.