Drawdown lifetime mortgages are one of the most popular types of equity release schemes. This is due, in large part, to the flexibility provided by this product.
The drawdown products that we advise on typically allow you to control the frequency of the money you withdraw as well as the overall amount of equity you take out, giving you more autonomy than you would experience with other equity release products.
What is a drawdown lifetime mortgage?
Unlike some of the more traditional lifetime mortgage products, such as the lump sum scheme, with a drawdown product, you don’t have to be entirely certain how much money you will need for the future. With a lump sum product, you take out all of the cash you think you will need in the future and it essentially sits in a bank account while you continue to pay interest on it. This isn’t the case with a drawdown lifetime mortgage, which allows you to take a smaller cash withdrawal to start.
This means that you aren’t paying as much interest, since you only ever pay interest on the money already withdrawn. You are able to keep more equity in the home, which means your overall balance is lower and you can release more equity, as needed, in the future.
With this product, you don’t have to leave cash in your bank account while you continue to pay interest on it. Instead, you take money out as needed and you pay interest only on the amount you have withdrawn.
How a drawdown lifetime mortgage works
There are a couple of factors that are taken into consideration when you apply for a drawdown lifetime mortgage. They are the value of your home and the age of the youngest homeowner. In addition, sometimes the overall health of the homeowner is considered, given that there are some programs available for those homeowners in poorer health.
In general, to be eligible for a drawdown lifetime mortgage, you must be at least 55 years old and you must own your home. The older you are, or the older the youngest applicant, the more cash you are likely eligible to receive. The amount available to you is based on the provider’s loan-to-value percentages, which go up as you get older.
When the drawdown facility has been established, you can decide how much money you want to release. Whatever amount you don’t initially take will be set aside in a reserve facility for future drawdowns. Those drawdowns are typically taken in much smaller increments than the first larger lump sum.
When you take future withdrawals, it typically takes just a few weeks to receive your cash. The interest rate that applies to the withdrawal will depend on the interest rate at the time of the withdrawal. This means that the interest rate on your initial lump sum and the interest rate applied to each of your withdrawals will not always be the same.
There are several benefits to taking out a drawdown lifetime mortgage. First, this type of equity release scheme offers a great deal of flexibility. You are able to take cash out in the amount you need, when you need it. Secondly, the interest you pay on your equity release only applies to the money you’ve actually withdrawn, and not the money set aside in the cash reserve facility. This can save a good amount of money when the home is finally sold.
You can access future withdrawals pretty easily, and without incurring any additional administration fees. In addition, there are some schemes available, with an enhanced lifetime mortgage product, that allow you to take out even more cash provided you have a qualifying health condition.
And finally, as with all equity release schemes, you retain ownership of your home while you live there.
As with all products, there can be some drawbacks involved in taking out a drawdown lifetime mortgage. Some providers will reserve the right to remove the drawdown facility from your product which means you’ll no longer have the ability to withdraw funds. Some providers can also put a limit on how big the drawdown facility can be in relation to the initial lump sum amount taken.
Finally, you have to keep in mind that the interest rate applied to future withdrawals will be at the interest rate applicable at the time of withdrawal. This can be risky, given the volatility of interest rates.
These benefits and risks are not exhaustive and we always advise you to reach out to us to discuss all of the programs that would be a good fit for your individual equity release needs.