A Complete Guide to Drawdown Lifetime Mortgages
I think you’ll agree with me when I say…
There’s a lot to learn about lifetime mortgage plans – especially the drawdown option.
However, with numerous unscrupulous providers and sites offering you vague information on equity release,1 trying to wrap your mind around this financial product can be difficult.
Lucky for you, with hundreds of hours spent nose-deep in research and more than ten expert consultations, this lifetime mortgage2 guide will offer you an inside look at the world of equity release and help you make an informed decision that may present your retirement a life-changing spin towards financial liberty.
If this scheme does not suit your needs, however, be sure to check out the on ‘Types of Lifetime Mortgage Schemes’ get to choose the plan that will help you solve your financial needs.
What is a Drawdown Lifetime Mortgage?
Drawdown options are the most popular lifetime mortgages since they provide you with a flexible cash reserve facility that offers easy access to your capital.
The drawdown lifetime mortgage plan3 was initially developed in response to the conventional schemes, where a homeowners, looking to budget over the long-term needed to consider the money they would likely need in the future. The homeowner would set aside the cash invariably sitting in a bank account, earning less interest than what the lenders were charging on equity release.
Today, when you take a smaller initial lump sum, meaning your lender will fine you less interest (since it is on a lower balance), and you inevitably retain more equity in the property for future use, if need be.
A drawdown facility gets rid of the need to keep unused equity release funds in the bank, and, instead, pass surplus cash funds with the plan providers. It means that your lender will only charge your interest on that which you withdraw.
How Does a Drawdown Lifetime Mortgage Work?
Like other equity release schemes, a drawdown plan allows you to unleash the equity in your home without having to downsize.
You have to meet certain conditions like:
- You have to be aged 55 or over
- Own a home in the UK,
- and your property should be at least worth £70,000
However, unlike other schemes, the drawdown plan provides you with the liberty to release capital as and when you need it. Here is a comprehensive run-down on how this scheme works.
- First, they will agree to an overall amount you can borrow, depends on your age, state of health and estate’s value
- You will then take an initial lump sum4 and put the rest in a cash reserve facility, all set for you to ‘drawdown.’
- After taking out the initial amount, you will then be able to release smaller amounts as and when you require them (minimum apply, but there are no new set-up fees)
- They will add the interest to the cash you took out, instead of the whole amount you borrow for the life of the plan
- You will not have to worry about making any monthly repayments– you will repay the full loan and interests when your broker puts up your home up for sale (when you pass away or move into permanent care)
Is a Drawdown Lifetime Mortgage Plan a Good Idea?
Drawdown lifetime mortgage plans are different from other schemes, hence their increasing popularity. They have some critical merits which may make them one of the smartest financial decisions you can make.
- The interest doesn’t mount up as quickly – since you only have to pay interest on the amount you withdraw, rather than the total sum in your reserve.
- You have flexible access to tax-exempt cash – you can draw out your money as and when you need and use it as you wish.
- You can continue living in your residence – you can benefit from any future increase in property value.
- Unlike other plans, it allows you to manage your means-tested benefits –enables you to avoid affecting state merits by taking lesser amounts.
- You have no obligation to make any monthly repayment – you only repay the loan and interest when the plan provider sells your home .
- There is no negative equity5 guarantee – it safeguards you, and it allows you not to keep your family in debt.
- You can always decide to move house– the only condition is that the home you’re moving to needs to match the criteria of your loaner.
- You have the chance to obtain a higher maximum cash drawdown scheme now with the invention of the enhanced lifetime mortgage range. View our article on ‘Enhanced Lifetime Mortgages’.
Pitfalls of a Drawdown Lifetime Mortgage
Like any financial product available, there are always certain limitations and drawbacks.
Some of these include:
- Some lifetime mortgage companies have the right to take away your rights to your drawdown facility.
- Drawdowns are typically at the interest rate applicable at that time, means they can vary depending on when you take them.
- Some equity release companies limit the size of the drawdown facility relying on the initial loan amount.
- Once you have used up the whole reserve, your loaner will require you to get further advice and an additional borrowing application.
A Drawdown Lifetime Mortgage and Your Means-Tested Benefits
One of the reasons why most people opt to take the drawdown option is because it is the most reliable option since it is less likely to impact your means-tested benefits.
With bank savings limits imposed by the Department of Work and Pensions (DWP) and local authorities, it is crucial that you don’t breach your balances when you release equity – this has the potential of affecting your eligibility to certain benefits.
By using a drawdown lifetime mortgage; however, depending on your provider, they can tailor the projected initial amount you will use in conjunction with any existing bank balance.
Through keeping this amount within the guidelines set out by the DWP, you can theoretically evade losing any perks you claim.
However, before you jump straight in, it is essential to get advice from your broker and financial adviser so that they can thoroughly evaluate your circumstances.
How Much Can You Borrow?
The amount you can release is dependent on a few factors like:
- Your property portfolio: your lender will send a surveyor over to give you a professional valuation
- Your age and health condition
It’s, however, possible to unlock between 20% and 50% of the equity (or value) in your estate, though the exact amount will vary from one individual to another, depends on your circumstance.
That said it only takes a few seconds to see how much tax-exempt cash you could unleash with our online equity release calculator.
Taking out a drawdown lifetime mortgage might be one of the best commitment you will ever make, considering it has fewer chances of affecting your means tested advantages among other pros. However, even with all the fantastic features of this plan, it’s always vital that you consider all your choices carefully and seek specialist advice from your financial consultant. It would be best if you also involved your family to ensure you make the best decision.
In case you need more information on this though, be sure to click here and see how much equity you can release and chat with us at no cost.
How much money could you release?
A lifetime mortgage plan allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.