- February 22, 2018
There are several reasons why drawdown lifetime mortgages have recently skyrocketed in popularity. They offer a level of flexibility that some other plans don’t and allow you to draw from a cash reserve facility for increased accessibility to your funds.
History of the Drawdown Lifetime Mortgage
Like many other products that were built in response to a consumer need, the drawdown lifetime mortgage has solved a common problem for retirees who wanted an equity release scheme but for whom a one-time payment didn’t make sense.
With a drawdown lifetime mortgage, you don’t have to take all of your equity release at one time. With a traditional lump sum lifetime mortgage, you would put whatever cash you weren’t immediately using from your equity release in the bank. You would still be paying interest on that money but wouldn’t be using it. The interest you would be getting on it while it sat in the bank would undoubtedly be less than the amount you were paying on it.
With a drawdown plan, you can take a smaller initial lump sum payment up front. Since you are only ever charged interest on the amount you’ve taken, this can save you significant money in the future. You also get to save the equity you didn’t take for future drawdown, if needed. With this plan, you don’t have to leave unused or unneeded money in the bank while you pay interest on it. You can just take what you need and drawdown the rest if you need it in the future.
How does a drawdown lifetime mortgage work?
In order to be eligible for a drawdown lifetime mortgage, you must be over 55 years old. If borrowing jointly, this age restriction applies to the youngest borrower.
The provider will determine the amount of your equity release by factoring in your age, the value of your property and your overall health. The amount that is arrived upon will be determined by the provider’s loan-to-value percentages. These percentages go up as you age so the older you are, the larger the cash facility that will be available to you.
Once you know how much equity you can release, you will want to determine how much of it you want to receive up-front, bearing in mind that you will accrue interest on any money you withdraw. Whatever amount you do not withdraw will be put in the cash facility for future drawdowns, if needed. Those drawdowns will be in smaller increments than your initial cash lump sum.
Future drawdown releases don’t take a long time to receive. You usually get them in just a few weeks and the interest rate that is applied is that one that is applicable at the time you request the drawdown.
How does this impact my means-tested benefits?
One of the biggest benefits of a drawdown lifetime mortgage is that they are not as likely to impact your means-tested benefits as some other equity release products.
By using this type of plan, we can work toward ensuring the initial amount is in tandem with any existing bank balance. This way, you keep the amount within the guidelines of the Department of Work and Pensions. This will put you in a better position to avoid losing any means-tested benefits that you claim already.
Benefits of a Drawdown Lifetime Mortgage
You get a good deal of flexibility with a drawdown lifetime mortgage scheme since you can control when and how much equity release you receive with each withdrawal. In addition, you are only ever charged interest on the amount you have already taken, and not the amount that is sitting in your cash facility. You won’t incur any additional charges for accessing more of your money and you can get those funds pretty quickly when you need them.
As is the case with all lifetime mortgage products, you can continue living in your home and you retain full ownership.
Drawbacks of a Drawdown Lifetime Mortgage
Some providers do maintain the right to take away your drawdown facility with this type of product which can be a drawback if you are expecting to be able to drawdown as needed.
In terms of your withdrawals, the interest rate applied will be that which is applicable at the time of the withdrawal. That means it could be a higher interest rate than it was when you received your cash lump sum. Finally, there are providers that will limit how much cash you can keep in your drawdown facility, which usually depends on the overall size of the equity release loan.
A drawdown lifetime mortgage can offer many benefits to the right retirees. To go over all of the advantages and disadvantages in more detail and to evaluate how much equity you might be able to receive, reach out to one of our nationwide advisers for more details.