Owning your house outright is a significant achievement, and is referred to in property circles as an unencumbered property. Owning an unencumbered property puts you in a strong position financially, and means you have collateral against which you can borrow if you need cash. An unencumbered property remortgage is an option provided by many mainstream lenders, and allows you to free up funds as a form of equity release.

A common misconception is that you need an existing mortgage to remortgage, but that isn't the case. If you own your property outright, you can still take out a mortgage against it. Lenders handle this as an unencumbered remortgage, where your home is used as security for a loan. With no remaining balance on a previous loan, the options available will be better because lenders see this as a lower risk than a standard mortgage. However, many of the same requirements apply as if you were taking out a new mortgage; for example, you will still need to meet specific affordability criteria to prove you can pay the money back.

Here, the residential real estate team at JMW explains how to remortgage a house with no mortgage, why you need a conveyancing solicitor if you switch to a different lender, and how the wrong decisions during the process can lead to financial difficulties.

Why Do People Choose an Unencumbered Remortgage?

An unencumbered property is a home that is fully paid for and under your complete ownership, with no charges, loans, or mortgages secured against it. This often arises when you have paid off a previous mortgage, but a property may also be unencumbered if it has been inherited or bought with cash. While a home or other property you own outright is a valuable asset, the value cannot be separated from the building. An unencumbered remortgage is a way to release equity without selling your home.

There are several key reasons why people may choose to release equity and take on a mortgage in this way.

Funding home improvements

If the property owner wants to build an extension, fit a new kitchen, or landscape the property's garden, using an unencumbered mortgage to fund home improvements makes more financial sense than a personal loan. This is because interest rates on mortgages are typically lower than interest rates on unsecured debts - although it is worth bearing in mind that a mortgage loan takes longer to pay off and may result in a larger overall debt over a long term.

Consolidating debt

If you have high-interest debts, like credit cards, you can consolidate them by taking out a new mortgage. Borrowing money means you can pay off these debts all at once, and then have one single monthly payment with a relatively low interest rate that should reduce your total monthly outgoings. However, you’re moving unsecured debt onto debt secured against your home, which means your house is at risk if you don’t keep up with the payments.

Purchasing additional properties

If you want to help a family member get on the property ladder, or buy a buy-to-let investment, an unencumbered remortgage provides the lump sum needed for a deposit or even the full property value of a second home. Using the equity in your current home is a popular way to grow a property portfolio.

Supplementing retirement income

If you’re approaching retirement, you will find your pension income is lower than you want. People use an unencumbered mortgage to provide a more comfortable lifestyle, although it is important to account for the financial impact of new mortgage payments.

How Do Lenders Assess Your Eligibility?

Even if you own your house outright, you are not guaranteed to be able to secure a new mortgage. Lenders will conduct an affordability assessment, and many lenders are strict with their criteria as they aim to verify that you will maintain monthly repayments over the whole mortgage term. There are several factors that a lender will look at to make this decision.

Loan-to-value ratio

The loan to value (LTV) ratio is the percentage of the property value that you want to borrow. For example, if your home’s worth is £400,000 and you want to borrow £200,000, the LTV is 50%. This is fundamental to how your borrowing capacity is calculated. LTV is also used for remortgages where the property is not owned outright, but it is calculated in a different way.

Most lenders will cap the LTV for an unencumbered remortgage, often around 80% or 85%, although it may be higher. A lower LTV ratio will give you access to better interest rates because the lender takes on less risk when you have more equity left in the property.

Your income and employment

Lenders check your regular income, and you will usually need to provide at least two years of tax returns and accounts, along with payslips if you are employed, evidence of self-employed income, or pension income. If you do not have regular income or your pension income is insufficient, you may find it impossible to secure a new mortgage deal.

Your credit score and history

Your credit history is used by lenders to look at how you’ve managed debt in the past. While having a mortgage-free property puts you in a strong position, credit issues will not be ignored and those with poor credit will pay higher interest rates.

If you have a poor credit history, some mainstream lenders will decline your application. However, specialist lenders work with people who have a bad credit history and it may still be possible to remortgage in this way.

Your age

Your age is a key factor that lenders consider. If you’re nearing retirement age, the mortgage term will be shorter, and lenders want to be sure you can afford the mortgage payments once you stop working. Some lenders have a maximum age limit for when the mortgage must be fully paid back.

What Is the Process to Remortgage a Property With No Mortgage?

The remortgaging process for an unencumbered property follows a similar path to a standard mortgage, particularly if you are switching to a new lender. If you are staying with the same lender that provided your most recent mortgage, some aspects of the process may not be necessary, but the experienced remortgage solicitors at JMW can advise you on what to expect when you get in touch.

1. Speak to a mortgage broker

Speak with a mortgage broker for guidance on the best deals available. You can also speak to a solicitor at this stage in the process for legal advice on your position and the potential impacts of a remortgage. This can enable you to evaluate your position correctly and make decisions that best suit your desired outcomes.

2. Mortgage application

You’ll submit a mortgage application to your chosen lender and provide various documents. These include:

• proof of identity
• bank statements from the last three to six months
• proof of income (payslips or tax returns)
• evidence of your property ownership

Often, a mortgage broker will prepare this on your behalf.

3. Property valuation

The lender will arrange a property valuation to confirm the current market value of your home, for which you will need to pay a fee. This verifies that the loan to value ratio meets their requirements.

4. Legal work and mortgage offer

Once the lender is happy with the valuation and your affordability, you will receive a mortgage offer. This will usually last for three to six months, which gives you more time to consider the move you wish to make. If you decide to go ahead, our solicitors will handle the legal side on your behalf. We'll check the title deeds and ensure no issues stop the mortgage from being registered. JMW also works on behalf of the lender to verify the details of the deal.

5. Completion

When the legal work is done, the mortgage "completes." The lender releases the lump sum to your solicitor, who transfers it to you. At this point, your home is no longer a mortgage-free property, as you have a new financial commitment and will start making monthly repayments.

What Are the Risks of Remortgaging a Mortgage-Free Property?

While an unencumbered remortgage provides financial freedom, it carries risks. For example, when you take out a mortgage, your home is used as security, and if you cannot maintain your mortgage payments, the lender will take possession of your home. As such, you can lose the house you own outright.

By taking out a mortgage, you’re reducing the equity in your home and this also means that the value of your estate will be lower. In turn, this will affect the inheritance you leave to your beneficiaries unless you are certain that you can pay off the mortgage before you die.

If property values fall after you remortgage, this can also affect the value of a remortgage. In the worst cases, where the value drops significantly, you could owe more than the property is worth. This is called negative equity, and while it is less likely for those who own their property outright, it is nevertheless a risk.

Over a long mortgage term, the interest costs will be high. You will pay back much more than the original lump sum you borrowed, and it is important to check the total amount payable over the life of the mortgage. On the other hand, if you wish to pay back the mortgage early, you could incur early repayment charges that can also make the mortgage less cost-effective.