Remortgage of an Unencumbered Property
A very warm welcome to episode two of the remortgage series on The Mortgage Mum podcast.
Tessa is here, asking your questions on very specific areas of the remortgage market. We’ve just done a very great contractor series and this time, it’s all about remortgages. If you’ve got any questions and you want them answered on The Mortgage Mum podcast, you can email us at info@themortgagemum.co.uk or on social media.
We’re talking today about how you can remortgage an unencumbered property.
What is an unencumbered property? What does unencumbered mean?
Unencumbered means that there is no mortgage on the property and no loans secured against it. It is fully owned outright and you don’t owe any money to anyone. It should be called a dream property. Everybody wants a property that doesn’t have a mortgage on it.
People often inherit unencumbered properties – that’s typically what we see. Or perhaps they have worked really, really hard and paid that mortgage off some time ago and are now looking at their options.
Can you remortgage an unencumbered property?
Yes. Let’s imagine you have an unencumbered property that’s worth £300,000. There’s £300,000 sitting in that home and unless you sell it, you don’t have access to that money. Unless you rent it out, you’re not generating an income from it.
A remortgage is a way of accessing the equity in that home. Perhaps you want to utilise some of that money for some reason – that’s why you would remortgage. Essentially you’re going to borrow money secured against that home and release the cash. The equity in that property will go down by however much you release.
With our example of a £300,000 property with no mortgage on it, let’s say you want to spend £100,000 on a new investment. Perhaps you want to add to your property portfolio or perhaps you want to renovate the unencumbered property.
You could remortgage for £100,000 and you’ll then have £200,000 equity in the home. You’ll invest or spend £100,000 of the £300,000 you originally had via a remortgage.
Why would you need to remortgage an unencumbered property?
There are all sorts of reasons why people remortgage an unencumbered property. It really depends on you and your circumstances. You might want to do home improvements, you might want to purchase another property. If you need a deposit, you’ve got money sitting in the unencumbered home.
You might have accumulated some debt and think it’s better to pay off the debt with some equity – you could do that. People might remortgage an unencumbered property to start a business or invest for growth in their existing business.
Other people do it for retirement, as it’s more expensive now that the cost of living is higher. Sometimes people that have retired will release money from their home to supplement their income.
Others might want to help their children or a family member onto the property ladder. The Bank of Mum and Dad is responsible for a big huge chunk of the market now – if it was a lender it would be in the top 10. It’s really common to release equity for a deposit. These are just some of the reasons why you might remortgage.
How do I know if I qualify or need to remortgage an unencumbered property?
It needs to be affordable. Even though the money is yours and is sitting in your house, a lender needs to feel that you can afford whatever you want to release. You’re going to owe them that money for a period of time, paying it back monthly.
It’s exactly the same as when you apply to purchase or remortgage a property. They’re going to look at your affordability.
As I mentioned, people sometimes inherit an unencumbered property or buy a property at auction with cash. It might not be in great shape, and it does need to be in a certain condition to qualify for a mortgage. But otherwise, it’s all about your affordability and you as an applicant and whether we can get you a mortgage.
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Can I remortgage a property in poor condition?
It depends what that condition is. Most mortgage lenders want the property to be habitable. There needs to be a working kitchen and a working bathroom. So do keep that in mind.
Some people gain a property at auction or through inheritance and they go in and rip everything out. Then they ask if they can get a mortgage to finish the renovation – but you need that working kitchen and bathroom.
There are still options for you in that situation. We do lots of creative products in our sister company – The Mortgage Mum Specialist Finance, which is exactly for situations like this.
You haven’t got a habitable property, you can’t remortgage, but there are products like a bridging loan where you can get the money, make the property habitable with that money and then remortgage it.
If it’s in poor condition, we can put a longer term plan in place with you, and that can actually make you money. That’s actually a great way of doing things. There’s always options.
But generally, if it’s in a poor condition a lender might not be satisfied because ultimately they’re securing this loan against the home. They’re going to do a valuation to make sure the home’s worth what we’ve said it is, and it’s in good condition.
If you don’t pay your mortgage and they have to sell it, will they be able to? If it’s in poor condition, you might need to be more creative about the process and the order in which we do things.
Can I remortgage an unencumbered property if I’m retired?
You can. It really depends on your age, because some people retire younger than others.
It depends what your retirement income looks like and whether that’s enough to get the mortgage you want. If not, there are still other options.
For example, in the later life lending market, there are retirement interest only mortgages, lifetime mortgages and other options. It just depends what category you’re going to fit into. The first thing is how old you are – that will determine what lenders will look at.
Lenders actually will go up to much older than people think. We’ve had mortgages for 80 year olds outside the later life lending market. It depends how you’re going to pay it off, if it’s repayment or interest only, and what your whole situation looks like. But if you don’t fit the normal criteria for a mortgage and you are retired, we can look at other options.
Once you’re over 55, we can look at the later life lending market and there are some really good options there. The whole market now is looked after by the equity release council so they make sure that it’s a very fair and correct decision for you.
Can I remortgage an unencumbered property if I’m self-employed or freelance?
You absolutely can. If you haven’t already, we’ve got another episode that is completely dedicated to self-employed or freelance clients.
For self-employed individuals, it’s about proving your income. Generally we need two years worth of accounts, and lenders will either take an average or just look at the latest year’s figures. It all comes down to affordability again. The only difference for the self-employed or freelance is how we prove your income.
Can I remortgage an unencumbered property with a bad credit history?
I also touched on this in the self-employed episode – it’s definitely worth listening to if you have bad credit. But to touch on this again, yes, you absolutely can remortgage with bad credit. It just depends how bad that is, when it happened and why.
The more open you can be, the better. You might be carrying a bit of shame, worry and perhaps fear of judgment, but please don’t. There are all sorts of reasons why people get into bad credit.
In the last few years, especially, we’ve seen people struggling with different scenarios: losing their jobs, having to keep up bills. It’s not been an easy economy for anyone.
We’re here to try and help you navigate your way out of it. You can remortgage with bad credit, but you may end up paying a higher rate. If we can’t find a high street lender who’s comfortable with your bad credit, we look at the specialist lender market.
We’ll always make sure that we give you a long-term plan. If we can’t tap into the high street, we’ll tell you when we think you can and at that point, hopefully, you’ll work with us again.
It’s just a case of taking one step at a time. But if you’re working with a professional, we can guide you through those steps. So don’t stick your head in the sand.
What are the benefits and risks when remortgaging an unencumbered property?
I’m going to start with the risks, because as you see at the bottom of every advertisement for a mortgage, your property is at risk if you fail to meet repayments.
Right now, if it’s unencumbered, there are no risks to anyone taking that property from you. No matter what changes in your financial situation, it’s yours and you own it. The second you secure any money against it, if you don’t keep up repayments there is a risk you can lose that property. That is a big thing to give up.
There will always be additional costs when you’re getting a mortgage – an arrangement fee, legal fees, potentially a valuation fee, so there are going to be some costs involved with releasing the equity.
Also, what’s the impact on your long term plan? Perhaps you’ve worked really hard to pay off this mortgage. You might have celebrated that day, and then this feels like you’re going backwards. We’ll make sure this fits with those long term goals – and sometimes you have to go backwards to go forwards. That’s what businesses do. They invest in their businesses to make them better. In some ways your home can be seen as a business – it is an investment.
You can potentially gain large sums of money at low interest rates, especially compared to a loan on the open market. And that’s something we would also look at. If you asked us for a mortgage for £5,000, we’d ask if you have looked at loans – because actually over the longer term, you may end up paying less.
It does give you flexibility. It’s hard to access large sums of money. A property with money sitting in it can really make a difference to your life. An unencumbered property that needs renovations could be worth so much more if you spend money on it. If you extended into the loft or added an extension, that will increase the property value.
Even though you’ve had to take a mortgage out, the equity you gain might be worth more than today. It’s an exciting prospect to have a beautiful home. You might go on to sell it to a family as their dream property. By remortgaging, you could potentially take a property to its full potential. I think that’s a lovely thing to do.
What else do we need to know about remortgaging an unencumbered property?
This scenario is such a big decision. You definitely need to sound it out with somebody and that’s what your mortgage advisor should be doing. We are invested in making sure it’s the right thing for you, and we love being on the journey with you.
It’s so valuable, on top of the fact we’re going to find you the best deal, help you with paperwork, streamline it and also, hopefully, you’ll learn something in the process.
I love this topic. Can you tell I’m passionate about remortgages? I’m looking forward to diving into different topics across the next few months. Thank you Tessa for gathering all the questions for us.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU REMORTGAGE.
