All you need to know about drawdown equity release mortgages
Drawdown equity release mortgages allow you to access money tied up in your home, taking an initial lump sum at the commencement of the plan and further withdrawals at amounts and times you choose. The remainder of the agreed total release amount is stored in a reserve facility until you want it.
How does drawdown equity release work?
Drawdown equity release mortgages (also known as drawdown lifetime mortgages) help free up a little extra cash later in life, as and when needed. You can spend the funds on anything you like, and it’s all tax-free. Here’s how it works:
- The mortgage provider calculates the total sum you can borrow based on age, health, and property value.
- When the agreement is finalised, you take an initial lump sum, and the rest of your accessible cash is held in a reserve facility.
- From that point, you choose how much you’d like to take out of your reserve fund and when.
- As you draw out money, your mortgage provider will charge you interest on the amount, but the remainder of the reserve fund remains in storage, interest-free.
- The total loan amount plus the interest accrued is paid when the home is eventually sold—either when the last account holder dies or moves into permanent care.
What’s the difference between a lump sum and a drawdown lifetime mortgage?
Simply put: flexibility.
A lump sum lifetime mortgage pays you the full release amount on the application completion; interest payments on the total amount begin straight away.
With a drawdown lifetime mortgage, you take your money out in smaller, spread-out amounts, where interest is only charged on the money you’ve taken. Depending on how much you take and when you could save thousands of pounds in unnecessary interest charges.
Without the accumulation of interest on the total agreed amount, you’ll save money from when your drawdown agreement starts.
Advantages of drawdown equity release
Equity release drawdown schemes offer several advantages; the following are just a few of the most well-known.
Interest costs accrue far more slowly
The roll-up cost of interest on lump sum lifetime mortgages can be costly and grow quickly. However, with the slower-rising interest costs associated with drawdown mortgages, you can maximise how much money you receive in the long term.
Because you get to choose when you take your money, you’re not stuck with monthly payments that you might not always need. If you plan to use the cash for possible medical costs, home improvements, holidays, or other luxuries, as opposed to releasing an additional income to achieve a comfortable standard of everyday life, you can do so without incurring any unnecessary additional costs.
Because the money is classed as a loan and not income, it’s totally tax-free.
You can organise withdrawals around your benefit payments
Some benefit and pension credit payments are subject to a savings threshold. If you receive pension credits, exceeding that threshold can cause you to lose your entitlement to such means-tested benefits. By making withdrawals when you need them but keeping your total savings under the threshold, you’ll retain your right to those allowances.
Your home is still your home
You retain the right to own your own home. Nobody can make you leave, and if the property increases in value, you’re the one who benefits.
There are no monthly repayments
Because the loan and interest are paid off when the property is sold, there are no monthly repayments.
You can still move house
Whether moving into a property of the same or larger size or downsizing, moving home is fine, as you’ll take your drawdown deal with you. You’ll have to have the move agreed upon by your lender, who will have set stipulations in your initial plan, but they should be reasonably agreeable.
If you’re downsizing, you may have to renew your drawdown agreement and make an early repayment, usually when the new property value isn’t high enough to cover the predicted settlement.
You’re protected by a 'no negative equity’ agreement
When the time comes for your home to be sold, your provider must comply with the ‘no negative equity’ regulations. This means that however much interest has accrued, they can’t charge your remaining loved ones anything over what the property sale brings and for any debt you may have accumulated within your plan.
Disadvantages of drawdown equity release
There aren’t too many disadvantages to taking drawdown equity; however, it’s worth considering all factors before making your choice, as there may be alternatives that could work better for you in your situation.
All equity release programs reduce the amount you leave as inheritance
If you plan to leave your property or the value it holds as an inheritance for your loved ones, every withdrawal and the interest it accrues reduces the total amount in the pot.
Interest rates may be slightly higher on drawdown mortgages
Your mortgage lender is likely to make less in interest repayments on a drawdown option, so they tend to charge slightly higher rates to make up for it.
Also, most lifetime mortgage plans work on variable rate interest, so your charges are likely to fluctuate over time, varying from one withdrawal to another.
Some providers put limits on how many withdrawals you can make each year
Rarely a deal breaker, but if your policy applies minimum withdrawal amounts, you must determine how much they are to plan them into your schedule.
You may not be able to expand your reserve fund if you hope to increase the money available
For those who get through their reserve faster than expected—paying for unpredictable emergency costs—you may be unable to expand the total loan amount. However, all is not lost; you may be able to remortgage with another provider taking advantage of more preferential terms. However, be prepared to pay for the option, as early repayment charges can be costly.
You may bypass the threshold limit for means-tested benefits
Depending on how much you hold in your savings, your initial or future withdrawal with a set minimum amount could be enough to push you over the allowed limit for many means-test state benefits. If you rely on those benefits as part of your daily living expenses, a drawdown lifetime mortgage might not be a good option for you.
What are the costs of drawdown equity release?
As with any mortgage, there are administrative fees and solicitor costs to pay. With interest rates and set-up costs varying from provider to provider and on each withdrawal, we’d suggest speaking to an expert mortgage broker for a realistic estimate and the best drawdown equity release plan for you.
Don’t worry about calling during office hours—our advisors are available late into the evening, or you can drop us a line via our contact page 24/7.
How do you access the money in a drawdown equity release reserve?
Access to your reserve is straightforward. Your lender will send you an offer document outlining the withdrawal terms, and once you sign and return the form, they’ll deposit the money directly into your bank account.
Depending on how much money you plan to take and when, it’s always worth consulting your mortgage broker to see if better deals are available and a switch that could save you money.
Can you still move house with a drawdown equity release mortgage?
Yes! The Equity Release Council demands all its members allow homeowners the right to move home. The stipulation requires the homeowners to move to a ‘suitable’ alternative property that is an equal or higher value to their current home and as easy to sell on the open market. This ensures the provider has just as easy a route into settling the loan when the time comes to do so.
As we said earlier, when homeowners are downsizing, they will have to make an early repayment charge set out as the relevant clause in their contract. Such fees can be costly, so exploring the numbers before you take out your plan is worth exploring.
If you’re looking for a flexible drawdown equity release plan that will provide much-needed funds for your retirement or simply to enjoy some of the money tied up in your home, we’re ready to help.
We’ve got plenty of drawdown equity release examples we can share with you to help explain how well it could work in your situation. So whether you’re facing emergency costs or simply fancy a few extra luxuries, renovations, a holiday, or perhaps a new car, your tax-free payments are yours to do with as you wish, and there’s nothing to worry about when it comes to paying the money back.
As a leading mortgage broker, we can access the specialist lenders that high street options don’t, whatever your situation or credit score. We’d love to find you the deal you deserve and save you money, so why not drop us a line to find out what that might look like?