Remortgage of an Unencumbered Property
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Remortgage of an Unencumbered Property
Kal Woodley explains the process of remortgaging an unencumbered property.
What is an unencumbered property?
In terms of mortgage lending, an unencumbered property is one you own outright. It could be a residential property, an investment property, a commercial or semi-commercial property. Essentially, it has no mortgage or secured debt attached to it.
When people talk about unencumbered properties from a property investment point of view, people tend to think this means that no one’s living there, which is also correct. But unencumbered in terms of mortgage lending refers to there being no mortgage debt on the property.
Can you remortgage an unencumbered property?
Yes, depending on the use of the property. If it’s a residential property, i.e. you own it and you live there, you can remortgage. You can raise cash using a mortgage.
However, that is subject to criteria and affordability. Your personal income comes into the equation and your circumstances are also considered – it’s the same as when initially sourcing a mortgage.
If it’s a Buy to Let property, it can be a lot more streamlined. Lenders look at the potential income for the property, because it’s all about debt serviceability. They would look at the lease agreement or the Assured Shorthold tenancy agreement and base the affordability of your mortgage on the rent or the lease income.
Both are possible. One thing to note is that when you raise cash or capital on your own personal property, you are entering a debt that has to be paid based on your income. You may want to also seek financial protection as well. So speak to your advisor not just about the mortgage, but about financial protection.
Why would you need to remortgage an unencumbered property? How do I know if I qualify to remortgage an unencumbered property?
There could be 101 reasons why you might want to remortgage that property. It might be to buy another property or raise cash to start a new business. It’s a lot more affordable to use a mortgage mechanism to do that than a business loan.
One of the most common cases is with later life lending. When you get to retirement age, the chances are your mortgage could be fully paid off. You’ve got your state pension but you may not have a private pension – in which case you might want to raise some cash.
It could be a lump sum to supplement your income to help you in later life. That’s an equity release model, and we’ve spoken about that in the past.
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Can I remortgage a property in poor condition?
For a mortgage application, the lender looks at the state of the asset – the property itself – and they benchmark that asset against market value.
If the property is in bad condition they look at other market comparables. They might see that in a better condition, the property would be worth a certain amount, but you might need to spend £50,000 to get it to that condition. They therefore take that £50,000 off the market price to get the property value.
That’s really important – because your mortgage is going to be based on that new valuation. If that’s lower, it affects the Loan to Value on your mortgage, which then can affect your affordability and so on. It can start to snowball.
Also, you won’t be able to get a mortgage at all on a property that’s uninhabitable. If, for example, there’s no toilet or no running water, no energy supply or kitchen, a lender can’t lend on it. If there is Japanese Knotweed on the property – that’s a whole new ballgame. A rundown property may not help you when it comes to getting a mortgage.
Can I remortgage an unencumbered property if I’m retired?
You can. This is the world of equity release, essentially. You can be retired or still be working, whether self-employed or employed. There are lenders that would consider you beyond state pension age. They’ll look at your ability to work and even the type of trade you do to check it seems plausible.
You could get a standard mortgage facility, as you would in your 30s, 40s or 50s. The term of the mortgage may be significantly less, but you can still get that type of product.
Equity release is another option for those in retirement that are on a pension and not seeking to work in retirement. The lender assesses the value of your home and the loan you’re looking to raise, together with your age and other factors.
The difference between an equity release product and a mortgage product is that a mortgage will have monthly payments. Most equity release products do not require you to pay a monthly mortgage cost.
Instead, they roll up the interest whilst you’re alive. It’s like an open-ended bridging loan that is paid back to the lender upon death. The lender reclaims the loan and interest from the sale of the asset.
Can I remortgage an unencumbered property if I’m self-employed or freelance?
There’s no difference at all. Your mortgage broker should be able to run affordability and assess your income as long as you’ve got your SA302s or your tax year overviews to document your self-employed income.
It will be based on what you have physically filed to HMRC. Even if you’re freelance, that’s fine. Your income just needs to be documented – that’s all your mortgage broker can use.
Can I remortgage an unencumbered property with a bad credit history?
Yes, you can. It’s no different from remortgaging using a mortgage product. It’s just a case of finding the right lender.
Again, when an advisor looks at a mortgage they always source the criteria first – based on the property, the client and their situation. In this case, that’s the bad credit. We then look at the affordability of the mortgage product to the client.
The short answer is yes, it’s not a problem. However, you will probably pay more on your monthly repayments or interest compared to someone with good credit.
What are the benefits and risks when remortgaging an unencumbered property?
If you are looking to buy another property or to start a business, it’s a great way of using debt rather than your own cash. That will help hedge your bets in what you’re trying to achieve.
It’s also structured debt. I love structured debt because if a client gets into trouble, the easiest way to pay back the loan is to sell the asset – so you’re able to get yourself out of financial harm’s way.
There are advantages in using an asset that essentially you’ve paid off. It is just a pot of cash sitting there. It’s accumulating growth, but can also be used to better effect than using your cash.
It’s always worth considering raising money against an unencumbered property to either invest into another property or start a new business. In my opinion, it’s the safest way to borrow money as it can be paid back by selling the asset.
What else do we need to know about remortgaging an unencumbered asset?
Some people haven’t taken out a mortgage in a very long time. A mortgage broker is always there to update you in terms of what’s happening in the market, what’s new, what other products are available and possibly other alternatives to a mortgage.
If you do choose to go with a mortgage product, whether you live in the property or if it’s a Buy to Let, your broker will be able to explain the financial risk and benefits to you.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU REMORTGAGE.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
