To release equity from your home, there are several types of plan you can take out. The most popular option, for over 55s, is to use a lifetime mortgage deal, but did you know there is more than one type of lifetime mortgage?
Think Plutus can help you understand the different types and get an idea of which would be best for you. Read on to learn about drawdown lifetime mortgages.
What is a drawdown lifetime mortgage?
A drawdown lifetime mortgage is an equity release scheme that allows you to release cash from your home in increments, whenever you need them. This is an alternative to receiving the full amount in a single lump sum.
It offers more flexibility than a standard lifetime mortgage as you can release the money gradually over time. There will be an initial lump sum at the outset then an approved facility that you can make withdrawals from whenever you need to.
Interest is paid only on the money you actually release. This means that a drawdown lifetime mortgage often works out to be a more cost-effective option, since interest doesn’t accumulate as quickly.
How do drawdown lifetime mortgages work?
As with other equity release plans, a drawdown lifetime mortgage allows you to unlock the cash that’s tied up in your home without the need to sell up and move to a smaller property. There are certain requirements to be eligible for any lifetime mortgage, such as being aged 55+ and owning a home which you live in within the UK. However, a drawdown lifetime mortgage differentiates itself from other plans in that you have the freedom to release money only when you need it. Here’s a brief rundown of how it works:
- Your lender will agree to a total amount you can borrow based on factors like your age, your health and the value of your property.
- You receive an initial lump sum, with the rest of the money kept in a cash reserve from which you can ‘draw down’.
- From this point, you can release smaller increments of cash whenever you need them (there will be a minimum amount for each withdrawal).
- Interest is added only to the money you’ve actually released, rather than the full amount available throughout the plan.
- You don’t have to make any monthly repayments as the loan plus interest is repaid through the sale of your house when you move into permanent residential care or die.
Drawdown lifetime mortgage vs. lump sum lifetime mortgage
A drawdown lifetime mortgage is an alternative to a lifetime mortgage that releases a single lump sum, such as a roll-up lifetime mortgage. The key differences are as follows:
- You get extra flexibility and freedom – cash can be released from your reserve whenever you need it, helping you leave funds for the future
- You pay less interest – interest is only charged on the amount you actually withdraw, so the funds in the reserve do not accumulate interest
- Less impact on your estate – with less to pay in interest, the value of your estate may be higher when you pass away
- Less impact on means-tested benefits – you keep greater control over your finances, so you can organise everything in such a way that your entitlement to means-tested state benefits is not affected
What are the advantages of drawdown lifetime mortgages?
- Flexible access to tax-free money – you can make withdrawals at your own pace and spend the money however you like
- Slower build-up of interest – since interest is only added to the money you release, not the sum in reserve
- Retain homeownership – you will still get the full benefit of any increase in the value of your property
- No monthly repayments – your home is sold to repay the loan plus interest, either when you move into permanent residential care or pass away
- Keep your means-tested benefits – you have control over what you withdraw, so you can ensure you don’t lose your eligibility for state benefits
- You can still move house – you just need to ensure the new property meets the lender’s criteria
- No negative equity guarantee – you will never leave behind a debt that your family has to repay
What are the disadvantages of drawdown lifetime mortgages?
- Equity release can reduce the value of your estate – this means your loved ones will inherit less
- New withdrawals can be subject to different interest rates – this is dictated by the prevailing interest rates and can be higher than your initial interest rate
- You sometimes get higher rates – some other types of lifetime mortgage tend to have slightly lower interest rates
- Limits may apply – you may only be permitted to make a certain amount of withdrawals each year
- It could still impact means-tested benefits – be sure to get reliable financial advice before committing to anything
- No guarantee of further amounts – if you wish to receive more equity than you originally agreed to draw down, you will have to submit a new application
- Early-repayment charges – if you want to repay the loan early the charges can be pretty hefty
How much will a drawdown lifetime mortgage cost me?
With drawdown lifetime mortgages, there is usually a fixed amount of interest on every sum you borrow. The interest rates can vary, so it’s important to make use of an adviser to ensure you are making a fully informed decision. In some cases, there will also be fees for setting up the drawdown equity release, as well as administrative costs and solicitor fees.
Is a drawdown mortgage the right option for me?
Borrowing money in later life can be challenging, particularly if you are retired. Lenders will make an assessment of whether your income is sufficient to pay back your loan, alongside your age. With equity release, these factors are not an issue.
If you are a UK homeowner over the age of 55, you could meet the eligibility criteria for a drawdown lifetime mortgage (or another equity release type) without the need for affordability checks. If you need to access regular, or even occasional, cash amounts to supplement your income, it could be a good solution for you.
You are free to spend the money however you want. It could be that you simply want to maintain a certain lifestyle in retirement, or you may want to treat your self to a dream holiday. Perhaps you just want to lend a helping hand to a struggling family member. One important thing to bear in mind is that, if you currently have an outstanding mortgage on your property, the drawdown lifetime mortgage must first be used to pay off the remaining balance.
The experts at Think Plutus will be able to assist with the decision of whether a drawdown lifetime mortgage is a good fit for you. We can also pinpoint the best plan for your circumstances. If you want to have a full understanding of the features and risks of any kind of lifetime mortgage, we can help.
What other types of lifetime mortgage are available?
A drawdown lifetime mortgage can be a practical way to supplement your retirement income, but it won’t be right for everyone. There are alternatives to consider, including different lifetime mortgages and other equity release schemes.
If you think a lifetime mortgage could be helpful, but are uncertain about the best type, please don’t hesitate to contact Think Plutus for advice. We have the knowledge, experience and expertise to help you make the right decision. For impartial equity release advice you can trust, Think Plutus.