Understanding Drawdown Lifetime Mortgage Schemes

Prospective borrowers looking for more cash to cover their expenses may find that a lump sum lifetime mortgage is an attractive option to unlock equity against their home. However, the rolling interest that compounds until death or admission to care may be of concern, especially if the initial amount required is relatively small.

Drawdown lifetime mortgages are a variation that can minimise rolling interest costs and secure a financial future. This guide will provide what you need to know about this equity release scheme, starting with a definition.

What is a Drawdown Lifetime Mortgage?

A drawdown lifetime mortgage, or “draw down mortgage”, is a type of equity release scheme that provides a series of cash withdrawals over time rather than one lump sum. The core premise behind this plan is to allow prospective borrowers to keep their funds in a facility for use in later life rather than receive a significant amount of money all at once.

Drawdown lifetime mortgages are fast becoming a popular alternative to other equity release products, minimising repayment costs through its unique feature set. Borrowers will only withdraw smaller amounts when needed, where the interest compounds only on the amount taken out.

The reserve may also allow the borrower to plan a more concise financial future. Drawdown facilities make it easier to leave an inheritance behind for your loved ones or address unexpected expenses without facing hefty interest charges.

A drawdown lifetime mortgage might benefit those considering an equity release scheme but have concerns about rolling interest. Let’s dive into how the plan works to understand whether it aligns with your needs.

How Does a Drawdown Lifetime Mortgage Work?

The primary function of a drawdown equity release plan is to create a reserve of funds that you can access when you need them most. The drawdown lifetime mortgage works much like a standard plan but without the instant delivery of the lump sum.

Instead, you’ll get a smaller sum of the total amount borrowed first, and the remaining funds will go into a drawdown reserve. The debt still doesn’t need to get repaid until after death or admission to care, but holding funds in the account means potentially fewer repayments at the end of the contract.

Applying for the drawdown follows the same criteria as a lump sum lifetime mortgage, including:

• Being a UK resident aged 55 or over
• Own a home in the UK that has a value of over £70,000
• The home must be your primary residence

The broker or provider you work with will determine your drawdown facility amount and interest rate according to your personal and financial circumstances and the value of your property. Let’s elaborate more on the drawdown reserve to understand how it works should you get approved for the equity release plan.

About the Drawdown Facility

The drawdown lifetime mortgage operates differently than a standard one because you won’t have a complete sum of the borrowed amount immediately accessible. It will go into a separate account the lender holds, accessible in chunks when you need the funds.

The most attractive factor behind the drawdown reserve is that you’ll only get charged rolling interest on the amount you take out. That’s rather than compounding until you pass or move into long-term care. It makes your repayments lower ultimately when your property gets sold.

So let’s answer the most frequently asked questions about the drawdown reserve.

How Much Can I Have in Reserve?

The amount you can have in reserve is generally uncapped, meaning, in theory, you could put the entire borrowed amount into the drawdown facility. However, the amount in the account is most often at the lender’s discretion. Usually, borrowers must take an initial amount, putting the rest into the reserve.

It’s common to see plans offer 50% of the initial lump sum, whereas the other half goes into a reserve. But again, the lender’s terms may differ according to their drawdown lifetime mortgage plans. Discussing conditions with an equity release specialist first is ideal before committing to a scheme.

How Do I Access Money in a Reserve?

The lender will hold on to the cash in reserve for you in a dedicated account, where they won’t charge interest until you withdraw the funds. Accessing the money you need is a relatively straightforward process.

The procedure includes:

1. Contact the lender to request a specific amount of cash from your drawdown reserve.
2. The lender will provide an ‘acceptance form’ outlining the reserve money they give you and any binding terms.
3. You’ll sign off, send the form back, and they’ll deposit the requested cash into your bank account.

If you have money in your drawdown reserve, you’ll repeat these three steps. But what if you need more funds than you have left for your expenses?

What If I Need More Funds Than in the Reserve?

One of the significant advantages of a drawdown lifetime mortgage is that you could potentially access more funds than pre-agreed with your lender. Your existing provider may agree to add more to the reserve once wholly withdrawn.

Before committing to additional funds, this matter should get discussed with an equity release expert.

So with core questions answered, let’s provide an example of a drawdown lifetime mortgage to clarify how the plan works.

Example of a Drawdown Lifetime Mortgage

Let’s create a scenario where a borrower wishes to pay off their existing interest-only mortgage, requiring a £20,000 initial lump sum to clear the debt. But the borrower decides they want additional funds to make home improvements to better the quality of life, estimating £50,000 would cover the costs.

The borrower wants a total of £70,000 but doesn’t require the whole amount up front, only the initial £20,000. Therefore, a drawdown lifetime mortgage is ideal in this scenario, not needing to pay interest on the £50,000 reserve.

If the lender offered a 4% interest rate on the equity release scheme, the borrower’s initial £20,000 would accrue to £4,333 in five years. The outstanding balance would be £24,333.

Should the borrow choose a standard lifetime mortgage with rolling interest on the total £70,000 sum, £15,166 would get added in the same amount of time. Over the same five years, the outstanding balance would be £85,166.

Only taking the initial amount from a drawdown lifetime mortgage saves the borrower £10,833 over five years – a significant amount. However, remember to speak to an equity release specialist to ensure that this plan is right for you before applying.

What are the Types of Drawdown Equity Release Plans?

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Variations of drawdown equity release plans might suit your circumstances over others. That’s why it’s essential to speak to a mortgage specialist before committing or applying to any scheme.

Let’s look at the two most prominent drawdown equity release plans below.

Drawdown Lifetime Mortgages

Drawdown lifetime mortgages function much the same as a standard lifetime mortgage, but with a significant difference. Instead of getting cash as a lump sum, you access it from a drawdown facility.

You’ll only get charged interest on what gets taken out of the facility, making it a more cost-effective way to get equity release.

Drawdown Home Reversion Schemes

A drawdown home reversion scheme again functions like the standard plan mentioned in the title. However, the money from selling part or all of your home gets deposited into a drawdown facility.

This scheme isn’t as popular as the drawdown lifetime mortgage as there aren’t many significant benefits outside of a standard plan. The only core difference is that your money goes into a drawdown account.

So by now, you’ll probably wonder how much a drawdown lifetime mortgage may cost, pending on your circumstances. Let’s dive into the interest rates behind these equity release plans.

What are the Interest Rates on a Drawdown Lifetime Mortgage?

Interest rates for drawdown lifetime mortgages vary depending on the value of your home, the age of the applicant, and other financial circumstances surrounding the applicant. Your lender will likely offer a plan with a variable rate rather than a fixed one. That variation is because of the nature of withdrawals over a long period.

These rates tend to fluctuate between 4% and 10% on the lower end of the scale. However, these can vary significantly, and a prospective borrower should seek advice from an equity release specialist.

So does that make drawdown lifetime mortgages more costly than standard ones?

Are Drawdown Lifetime Mortgages More Expensive than Lump Sum Equity Release Schemes?

Whether drawdown lifetime mortgages are more expensive than lump sums depends on how much you withdraw and how frequently over time. The general aim of the plan is to minimise interest costs by only charging rolling rates on what you take out.

However, suppose you regularly request funds from your drawdown reserve. In that case, the accrued interest could equal or surpass what you’d pay with a lump sum scheme. The general recommendation is that if your initial amount can last you a significant amount of time, drawdown lifetime mortgages may be the more inexpensive option.

Again, an equity release expert can clarify the best plans according to your financial goals and needs. So now, with the vital information about drawdown lifetime mortgages behind us, we can start weighing up whether this might be an equity release plan to pursue.

What are the Benefits and Pitfalls of a Drawdown Lifetime Mortgage?

Like every equity release scheme, each has pros and cons. Let’s review the benefits and pitfalls of drawdown lifetime mortgages to gauge whether they are right for you.

Advantages of a Drawdown Lifetime Mortgage

The positives of a drawdown lifetime mortgage are:

• Minimise the costs of equity release by only getting charged interest on what you take out.
• Maximise your control over your lifetime mortgage with more flexibility and freedom to amend your plan.
• The plan may not affect your means tested benefits as a lump sum could.
• No interest payments on any drawdown cash in your reserve.
• Taking money over time means there’s a reduced impact on inheritance tax.

So let’s look at the potential disadvantages of a drawdown lifetime mortgage.

Disadvantages of a Drawdown Lifetime Mortgage

The typical concerns of a drawdown lifetime mortgage are below:

• Your funds left in reserve have no guarantee by the lender and can get withdrawn at their discretion.
• Providers will set limits to initial amounts and further withdrawals, limiting the funds you may need.
• Drawdown lifetime mortgages can still affect tax position and means tested benefits depending on the amount taken out.
• Interest rates can fluctuate throughout the contract, adding uncertainty to the final repayable amount.
• Hefty early repayment charges may apply if you wish to settle the debt before the contract’s end.

The general positive of a drawdown lifetime mortgage is the minimisation of costs and higher degrees of flexibility. However, the centre of the negative around many plans is unpredictable and imposing limits despite their advertised flexibility.

It’s imperative to speak to an equity release specialist to understand if this plan tailors to your circumstances. There’s a better understanding of the advantages and disadvantages with expert knowledge backing up a drawdown lifetime mortgage’s features and functions.

But we can get an initial grasp of whom this plan would suit before seeking information from an expert.

Should I Apply for a Drawdown Lifetime Mortgage?

Personalised assessments of your financial circumstances and equity release plans should get drawn up by your equity release expert. A platform such as this can help you find a broker knowledgeable about the different schemes and whether you should apply for a drawdown lifetime mortgage.

Borrowers looking to get an equity release to cover a small number of expenses at first may benefit from a drawdown lifetime mortgage—those seeking security on their financial futures with a reserve of funds available for unexpected costs.

Again, it’s vital to understand if your current situation can benefit from a drawdown lifetime mortgage by speaking to an equity release expert.

Discuss Drawdown Lifetime Mortgages with an Equity Release Specialist

Nearly every lifetime mortgage provider will offer a drawdown plan. Using a broker to gauge and present the best schemes can save you time and money and thoroughly outline the risks of committing to an equity release plan.

Use this platform to connect to a broker that works for your best interests.