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  • Mortgages & Finance

    The power of owning a property with no mortgage on it

    I came across Lisa Orme's blog and wanted to share her thoughts here about the benefits of owning an unencumbered property:

    Should finances allow, I commonly suggest that investors obtain or keep an unencumbered property (no loan of mortgage secured on it) as quickly as possible as it’s an incredibly powerful tool to have at your disposal and here’s why.

    Firstly it’s always there to fall back on; no matter how low lenders reduce LTVs you’ll nearly always be able to raise cash on it in an emergency. You never know when you may need some quick cash and if your portfolio is geared up and lenders move the goal posts you may find yourself unable to lay your hands on some urgently needed cash. This may be for the deal of a lifetime, it may be to help a friend or relative or it may be for an unexpected bill!

    Secondly, having an unencumbered property enables you to strike all sorts of deals with partners and lenders. You can create the equivalent of a revolving loan or drawdown facility, you can use it as collateral for a business loan or a joint venture for example.

    However the most significant reason for having an unencumbered property is it enables No Money Down financing perfectly legitimately. Let me demonstrate…

    You buy a property that you intend to refurbish for 100k – you’d typically have to put in say 30k deposit plus costs of works and purchase and finance costs of say 30k. So you have to find sixty grand.
    Now imagine you have a property worth 100k that’s unencumbered.

    You could bridge across the two properties and get all of your purchase money and costs and make it a true and legitimate No Money Down deal.

    Once the property is sold on you repay the bridging loan in full returning to an unencumbered property plus profits (hopefully!) You could remortgage the new property or even remortgage the original unencumbered property and then leave the new one unencumbered and so on. There are many factors that come into play here depending upon your strategy but hopefully you see the point.

    Full/source story

    Lisa goes on to say that one of the quickest ways to obtain an unencumbered property - apart from saving cash to buy one - it to take an existing property in your portfolio, change it to a repayment mortgage, and over-pay to pay down the debt as quickly as possible.

    Great advice from Lisa, as always!

    [Image: house.png]Related content:

    Making the most of unencumbered properties

    Maintaining easily accessible liquidity within a portfolio

    Create the "Royal Bank of [Your Name Here]

    Starting with an unencumbered property

    Large equity - how to get at it?
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    The NMD example - it is not No Money Down as you are using equity. If I was to draw a diagram it would show actual "money" being removed from the unencumbered property and being used as a Deposit for the new one.

    Yes - Im being facetious.

    BUT you may find it hard to do so on an "unencumbered property" as many bridging lenders do not like FIRST CHARGE loans. Although not impossible!
    AND a property does not have to be unencumbered to use the technique - it has to have some equity.
    ALAS you are still using bridging rates. Compared to the investors that have a term mortgage on the property and have the cash at hand instead.

    Not that I am trying to convince anyone not to have an unencumbered property - having one is a great backup. It looks great on your "portfolio list" when you sent an enquiry for a new mortgage - as in essence underwriters know there is an asset of worth that they can put a charge on if you default. Lenders all drop LTV's in a downturn on remortgages - you have that equity to use. It is - a nest egg for a rainy day.

    It is the opposite of leverageing; I see your unencumbered property and propose that is a deposit for 3/4 properties, 3/4 additional income streams, monthly profits and additional 3/4 properties capital appreciation.

    Lisa, always gives good advice. Its a good blog post to read.
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    (17-06-2015 10:10 AM)Adam Hosker Wrote:  The NMD example - it is not No Money Down as you are using equity.

    It is NMD Adam as you haven’t had to put any money in - the big stumbling block for many.

    (17-06-2015 10:10 AM)Adam Hosker Wrote:  BUT you may find it hard to do so on an "unencumbered property" as many bridging lenders do not like FIRST CHARGE loans. Although not impossible!

    Eh????!!!

    You’ve lost me there; I arrange bridging on unencumbered properties all the time. Bridging lenders prefer a first charge so I’m not sure if you’ve missed something out of your sentence but that ones lost on me.

    (17-06-2015 10:10 AM)Adam Hosker Wrote:  Lisa, always gives good advice. Its a good blog post to read.

    Thanks and thanks for posting it Vanessa.
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    Lisa All comments are for education and information purposes only and do not construe as advice or a financial promotion. No liability is accepted for comments made. If you wish to receive information in an advisory capacity then please contact me about becoming a client. www.keys-mortgages.com


    So theoretically could raise bridge loan from unencumbered property and also on a new property purchase; if same lender and got whiff of this would they be reluctant to lend?

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    I did say I was being factious but Equity is Money (if by any other name). A charge of £Xk is put on the property.

    Their are many secured loan lenders that do not do 1st charge lending. You only have to look at the quantity of "second charge" lenders in the market. For instance CastleTrust did not do first charge until more recently.
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    THIS PROPERTY TRIBES ACCOUNT IS NO LONGER USED.
    DO NOT SEND PRIVATE MESSAGES.

    --- MORE INFO HERE ---

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    Ahh you're confused there then Adam; I'm not talking about secured loans! I'm talking about bridging - two different things.

    Best wishes, Lisa
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    Lisa All comments are for education and information purposes only and do not construe as advice or a financial promotion. No liability is accepted for comments made. If you wish to receive information in an advisory capacity then please contact me about becoming a client. www.keys-mortgages.com


    I think it makes a lot of sense to have an unencumbered property within your portfolio.

    It is like another tool in your tool box imho.

    1. Use it to secure bridging against.

    2. Use it to reduce risk.

    3. You can do what you like with it - no mortgage T & C's to adhere to - gives flexibility.

    4. You can enjoy 100% cash flow.

    5. Immune to interest rate rises.

    6. Immune to voids.

    Anyone think of any other benefits?
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    Like Adam, I have reservations about keeping an unencumbered property in order that it can be used for bridging, or other effectively similar finance arrangements, I must admit.

    There are bound to be subtle differences, on the surface, in the psychology of people who adopt such a policy, but under the surface they may have vastly different attitudes.

    [I'm reminded of those adverts for Wonga, where they get people to "Tell me something you weren't expecting?" and get a variety of answers, such as "my car breaking down", "rain!" "my third child!" to make us all feel comfortable taking such finance, as if it's normal. That's just life, isn't it?! Only, most of us think that's not just life, that's bad planning for the inevitable ups & downs of life!]

    We have some unencumbered properties and I must admit, in the back of our minds we know we could turn to them given highly unexpected circumstances but we really hope and expect not to do so. Instead, we keep our bank balance high enough to allow for all eventualities - hopefully.

    Whereas some might be like a kid with a piggy bank, always dying to smash & raid that thing!! In which case, as Adam said, they'd probably be better off having cheaper mortgage finance and having the temptation to borrow on more expensive terms removed.

    Also, I would think lenders might be cautious if they find a portfolio that's otherwise perhaps too highly geared but with one unencumbered property... As I mentioned on the MX thread yesterday, they were very glad to see no over-geared properties in my portfolio.

    Angela
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    Author of The Complete Guide to Property Strategies and The Complete Guide to Property Investing Success
    Learn more at http://www.completepropertysuccess.co.uk

    I also post property updates on my Facebook Page

    "It is the small decisions you and I make every day that shape our destiny" Anthony Robbins


    Would it not be better to keep the cash in the bank that's been used to pay down the unencumbered property?

    No high borrowing fees every time you need to access the cash.

    Tax advantages of a mortgaged property.

    If interest rates climb too high, then use that cash to bring LTVs down over whole portfolio.
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    Complicated question Tassotti.

    If you have a low loan to value mortgage (and cash therefore at hand) you will be paying mortgage every month - at a low rate - but its every month.

    If you have no mortgage (therefore cash locked in property) every time you want to use the equity. Your paying high rates, valuation costs, application fees, etc..

    Which ever adds up as "best" depends on how many times. If your not going to use the equity in a year or so. Probably best unencumbered. If you want/need easy access better to have the cash at hand.
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