You might be in the fortunate position of having paid off your mortgage – whether the mortgage on your main residence or a buy to let mortgage. Although you are glad that there are no monthly mortgage repayments to make, you rue the fact that there is so much capital locked up in your 100% equity of the property.
You have probably heard of property owners who have gained an improved mortgage deal or unlocked a percentage of their equity and raised additional cash through remortgaging. You ask yourself, therefore, whether you can remortgage a paid-off property.
Mortgage or remortgage?
Credit reference agency Equifax explains that you remortgage a property you own when you pay off any existing mortgage with a new one – effectively, a remortgage is a replacement mortgage.
If you have already paid off any mortgage on the property or if you bought it outright without the need for a mortgage, the property is said to be “unencumbered” (by a mortgage, other loans, or any additional charge).
Some might argue that an unencumbered remortgage is a contradiction in terms. If your property is unencumbered you cannot, by definition remortgage it. If there is no existing mortgage and you want to raise a mortgage on the property, it is argued that you need to start from scratch by securing a mortgage – rather than a remortgage.
The fact remains, though, that if you have already paid off the mortgage on the property – or never had one in the first place – you have considerable capital value tied up in the property. By borrowing against that equity as security, you can unlock cash to spend on improving, extending, or refurbishing the property, raise funds to invest in other property, or even treat yourself to a new car or holiday.
Whether you call that secured borrowing a mortgage or a remortgage in practice makes little difference – you are arranging a loan against your property (unencumbered or otherwise). You must make the appropriate application to a mortgage lender.
Remortgaging a paid-off property – checks the lender will make
When you apply to remortgage a paid-off property, the lender needs to be reassured of the same factors that would have determined an initial mortgage on the property. So, the affordability of the remortgage repayments and an assessment of your financial standing and responsibility as measured by your past credit history.
If your property is unencumbered because you have paid off a previous mortgage, you might have a head start. This is because you have already demonstrated a level of financial responsibility and reliability in managing that debt and making the repayments as they fell due.
Nevertheless, when you are applying for an unencumbered remortgage, the lender recognises that your circumstances may have changed. So, it will be necessary to check once again your current income, expenditure, outgoings, and whether you have other debts and open lines of credit.
Since you arranged any previous mortgage, there is likely to have been all manner of reported activity on your credit record. You might even have instances where you made a late payment or failed to repay certain debts as they fell due. You might also have had goods repossessed or been forced to declare bankruptcy. Although you do not need a perfectly clean credit record to secure a remortgage, the healthier it is, the more:
- extensive the range of potential lenders available to you;
- attractive the deals you are likely to be offered; and
- the more competitive the interest rates you may need to pay.
What is the value of your property?
Central to consideration of your application for a remortgage is the value of the property you offer as security. The value will have been subject to any changes since the original mortgage was arranged, so the property will need to be revalued – and you need to be prepared to pay for that valuation.
Just as with your original mortgage, you are almost certain to need a deposit to contribute to the remortgage loan. The size of the deposit you have available clearly affects the loan to value (LTV) ratio you are offered – the remortgage loan as a percentage of the value of the property against which the loan is secured.
The lender might also assess the business case for your remortgage application in terms of the use to which you intend to put the borrowed funds. If you are planning to extend or improve your home, for example, the lender might investigate the likely increase in capital value the works may produce. If you are planning to invest in buy to let property, the lender might want to know the anticipated rental yield.
Because there are so many options and variables when remortgaging a mortgage-free property, seeking the advice of a mortgage broker may make sense. They can then help match you to the lender who is most likely to offer you the most suitable loan – saving you time, money and effort in the process.