What is an unencumbered mortgage?

If you own your home outright, you may be eligible for an unencumbered mortgage, which can be used to release equity from your property. 

We explore what you need to know. 

What is an unencumbered mortgage, and how does it work? 

An unencumbered mortgage is a mortgage obtained on a property that you fully own. 

This differs from a traditional mortgage, which is typically used to purchase a property and then pay off the outstanding amount over the term, which can be up to 40 years.  

A remortgage is when you switch your mortgage to a new lender, which usually offers a more competitive deal.  

You may own your property outright if you’ve already paid off your mortgage, inherited a property with no mortgage, or bought it with cash.  

With an unencumbered mortgage, you can release equity and get a lump sum from your home, which you can use for various purposes, such as renovating your property.  

What is an unencumbered mortgage useful for, and how much can I borrow? 

An unencumbered mortgage can be used for many things, such as: 

• Home renovations 

• A deposit on another property, such as a buy-to-let or holiday home 

• Paying off or consolidating debt 

• Major family events, such as a wedding 

• Purchasing a new car 

• Capital for a new business 

• To financially support family members  

How much you can borrow varies depending on the mortgage lender. However, lenders will use a multiple of your income, which is typically between 4 and 4.5 times your annual earnings.  

So, if a lender uses a multiple equal to 4.5 times your annual earnings, and your earnings are £40,000, you could borrow up to £180,000. 

It’s also worth stressing that you don’t need a deposit for an unencumbered mortgage because you own 100% of the equity in your home. 

It’s worth getting an agreement in principle to see how much you could potentially borrow and talking to a qualified mortgage broker, who can help you find the right deal for you. 

It’s also worth considering whether an unencumbered mortgage is right for your needs, or if there is an alternative worth considering. 

What criteria do I need to meet to qualify for an unencumbered mortgage? 

Applying for an unencumbered mortgage is a similar process to applying for a traditional one.

So, this means you’ll need to fulfil the same criteria, including passing affordability checks to ensure you can pay back the loan. 

Similar to a traditional mortgage, a lender will assess your income, outgoings, credit history, age, employment status, and any outstanding debt.

You’ll also need to produce payslips, bank statements, and any other documents the mortgage lender requires. 

A mortgage broker can be useful by recommending lenders that may be more favourable to your circumstances – for example, if you’re self-employed or have a bad credit history.  

What are the pros and cons of an unencumbered mortgage? 

There are several advantages and disadvantages to consider when considering an unencumbered mortgage. 

The pros of an unencumbered mortgage 

• Potentially lower interest rates: You may be able to borrow money and pay it back at a lower interest rate compared to other loans. So, you may benefit from lower monthly payments and pay back less interest overall.  

• It can be convenient: Having the ability to access equity from your home with a longer repayment period than a traditional loan can be useful. If you’re using the money to renovate or extend your home instead of moving, this could save you time and money.  

• Flexibility: You may be able to borrow more compared to other loans. With other types of loans, you may have limits on how much you can borrow and smaller repayment periods.  

The cons of an unencumbered mortgage 

• You’ll need to afford the monthly payments: An unencumbered mortgage can reduce your monthly income significantly. If you’re retired or working part-time, consider whether you can afford the mortgage. 

• Interest payments add up: You’ll likely have many years to pay back the mortgage, so you’ll accrue more interest. However, if you’re retired, you may find it harder to get your application approved or have a shorter period to repay the loan. It’s worth considering alternatives if you want to borrow money, especially for a small amount.  

• Your home is at risk: If you don’t keep up with monthly repayments, you could lose your home.  

• Be wary of property value fluctuations: If the housing market struggles and the value of your property falls, the amount you borrow could represent a bigger proportion of the value, which could also impact your future borrowing.  

• You’ll need to pay fees: Similar to a traditional mortgage, you’ll have to pay fees for an unencumbered mortgage, which could hike the cost of borrowing money.  

Get expert mortgage advice 

Finding an unencumbered mortgage can be tricky, which is where a mortgage broker can help. 

A mortgage broker can search the whole market and make an informed recommendation based on your unique circumstances, as well as support you throughout the application process. 

Unbiased can quickly match you with a qualified mortgage broker.