Property ownership is not without its horror stories, but not everyone is lumbered with an interest only mortgage they can’t pay off or trapped in negative equity. Some are fortunate enough to own equity in their property, or even own it outright.
Remortgaging to release equity from a property ‘in the black’ can be a popular way to raise money. This practice is not without its downsides – the servicing of additional debt chief amongst them – but being able to raise cash is a boon if you need to make a large, one-off expenditure or pay off other debts.
Whilst we hear about remortgaging for properties with loans already secured against them, however, we don’t always hear an awful lot about the practice of taking out a new mortgage on an ‘unencumbered property’. Unencumbered properties – that is, those with no debt secured against them at all – can be capital goldmines, but we suspect that many people are unsure if you even can mortgage a home that you already own outright.
The answer is that you can. The chief question therefore becomes a much more important one: should you?
Taking out a loan on an owned home
Having unencumbered property gives you much more scope to find competitive loans – for instance, if you need £20,000 and own a £200,000 property, you only need a loan with a 10% LTV (loan to value) ratio.
Generally speaking, the lower the LTV, the more competitive the interest rates and the more range you have to find a mortgage that suits you. Additionally, several lenders will treat a new mortgage on an unencumbered property as a remortgage, meaning that they may offer free legal fees and valuations.
The cash that you release from your home can be spent on anything – people frequently release equity for weddings, holidays, cars, home improvements or even to consolidate other debts. Those who do, however, should be absolutely sure that they can afford to do so.
The most vital point to consider is that a mortgaged property is no longer unencumbered. Your home will once again be security for a debt; if you cannot repay that debt, your home may be repossessed.
Also consider that you may have to pay for a broker fee, booking or application fee, arrangement fee, valuation and legal costs. Between these additions to the up-front cost, it can quickly start to look like a very uneconomical decision.
It’s also worth pointing out that a mortgage lender might not even consider an application for an exceptionally small loan.
Making the right decision
It’s understandable to think that, as your owned home has untapped value, you should be able to access that value. Whilst this is reasonable, there are many implications to consider.
Can you service additional debt? This is essentially a ‘cash advance’ for a home you still own, and it will need to be repaid. This entails monthly payments which, if you have a restricted income, large monthly outgoings or are retired, you might struggle to make. The shorter the term of the new mortgage, the larger the repayments will be.
Is this the cheapest option for raising capital? Mortgages offer better rates than many secured and unsecured personal loans, but with large up-front costs and long periods of interest to consider, this option could still be very expensive.
What do I need the money for? Consider that your monthly outgoings will increase with mortgage repayments. If you do not need the money immediately, saving this surplus might be a better alternative. If you cannot afford this, simply put, you could not afford a mortgage.
If you need to raise capital, assess all of your options for doing so. This could include borrowing from friends and family, saving your own money, moving to a less expensive property, taking out a personal loan, selling belongings such as cars or furniture or getting a credit card.
Ask yourself: which options will get me the money I need when I need it? Which has the cheapest long-term cost? Can I meet any short term, regular costs?
If you can definitely afford it, remortgaging your unencumbered property might well be the best option for you. If you do intend to take this step, I strongly recommend you speak to a mortgage adviser.
About the Author
This is a guest post by Emma Green from TurnKey Mortgages. Emma has a keen interest in personal finance and a passion for helping others with their own.