Drawdown Lifetime Mortgage

This article is a guide for people in retirement who are interested in taking out a drawdown lifetime mortgage. It aims to answer some of the most commonly asked questions about drawdown products.It will give you advice, tips, and other information on how drawdown lifetime mortgages work.This will help you find the best drawdown equity release for your circumstances.

You can listen to an audio recording of this page below.

What is a drawdown lifetime mortgage?

A drawdown lifetime mortgage is a type of life mortgage where you can release equity from your home in a series of small withdrawals.

This is instead of simply withdrawing one large cash lump sum at the start of the mortgage term.However much money you choose not to withdraw is held in a special cash reserve bank account for you to use as you wish in later life.

Drawdown lifetime mortgage schemes are quickly becoming the most popular equity release products. This is because they offer a solution for keeping down the costs associated with lifetime mortgages.By withdrawing smaller amounts to top up your pension income when needed, you will minimise debt because compound interest will only roll up on the money you have released.

So, you may be able to leave more money as an inheritance for your family after you die.You can use an equity release calculator to learn more about the amount of equity you could release from your home.Releasing equity can also negatively impact your tax position and entitlement to means-tested benefits.

So, it is important to call a professional advisory service to understand whether or not a life mortgage is right for you.

Here is a video about lifetime mortgages.

A video explaining all you need to know about Lifetime Mortgages

What is the difference between equity release and a lifetime mortgage?

Lifetime mortgages are a specific kind of equity release product.

In this kind of plan, a homeowner takes out a loan secured on their home in order to unlock money that is currently tied up in the value of their property.

The borrower retains ownership of their home, and so continues to live there rent free.

Like other types of equity release, lifetime mortgages are authorised and regulated by theFinancial Conduct Authority and the Equity Release Council.

How does drawdown equity release work?

To qualify for a drawdown lifetime mortgage equity release plan, you must normally meet the following lending criteria:

You need to own a property in England or elsewhere in the UK valued at over £70,000.

This property must be your main residence. Some lenders specify that it cannot be sheltered housing, on a site next to or above commercial premises, or be a Grade I or II listed building.
The applicant must be at least age 55. For joint applications, both of the homeowners should be over 55 years old.
You must seek professional financial advice.

However, these criteria can change between lenders.

The lifetime mortgage provider will then determine your drawdown facility and interest rate. They do this by considering the age of the youngest applicant and the value of the property.

The rate you are offered then depends on the lender’s loan to value (LTV) percentages.

There is considerable variation in lifetime mortgage rates between different providers due to differences in the maximum loan-to- property value percentage that they offer. However, usually, the older you are, the bigger the amounts you can borrow.

Once the equity release facility has been calculated, the borrower can decide the amount they would like to withdraw as a cash advance. The borrower usually receives a smaller initial cash advance than in a standard lump sum plan.

However, any surplus money from the LTV will be held by the lender. This is so the borrower can then release money when they need it later.

This also stops interest rolling up on the surplus of a large loan, and helps keep debts under control.

By contrast, with lump sum plans, homeowners need to picture themselves in the future to try and calculate how much equity they might need to release to keep them going in retirement. Drawdown mortgages offer a solution to this problem.

Lenders do not usually charge the borrower for the administration costs involved with withdrawals. You will also not have to make any drawdown lifetime mortgage interest repayments unless you choose to do so with a flexible plan.

You can use a drawdown lifetime mortgage calculator to work out the amount of money you could receive.

"A drawdown lifetime mortgage is a type of life mortgage where you can release equity from your home in a series of small withdrawals."

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What is the average interest rate on a lifetime mortgage?

The majority of lifetime mortgage equity release plans have a fixed interest rate for life. The interest ranges according to lifetime mortgage providers, your individual circumstances, and the product you select.

The cheapest lifetime mortgage providers will charge interest starting at somewhere between 2.5 and 3% AER. But, it is not unusual for a plan to have a roll-up of 4-6% AER.

This means that interest can accumulate very quickly and little to nothing may be left for your estate to inherit once you die.

You can see how much you can borrow by using a drawdown mortgage calculator.

What are the advantages and disadvantages of drawdown lifetime mortgages?

Advantages of drawdown mortgages

Having a cash facility means you can release money in smaller amounts as and when you need it. For example, it can help you top up your retirement income on a regular basis, make home improvements, or give a gift to a younger family member.
A mortgage drawdown facility means you may not need to repay as much interest as you would with a lump sum lifetime mortgage product.
The cash you release with a drawdown lifetime mortgage is tax free.
You won’t need to make any monthly interest repayments. However, you can choose to pay interest with a flexible drawdown lifetime plan to keep costs down.
You will receive the same protections and no negative equity guarantee with equity drawdown as you would in other lifetime mortgage deals. This is because all equity release products are authorised and regulated by the financial conduct authority.

Disadvantages of drawdown lifetime mortgages

You will not be able to leave your house as an inheritance to your beneficiaries. This is because your house will be sold either upon your death or once you enter long term care in order to repay the loan and interest.
Equity release via a lifetime mortgage may not be suitable for those living with a dependant resident on site.
When you release equity from your house, this may impact your tax position as well as your entitlement to state benefits and pension credit. You should call an adviser to ask any questions you may have about how a drawdown lifetime mortgage will affect your eligibility for means-tested benefits.
You will only receive a cash facility for a certain percentage (LTV) of your home’s total market value. Lifetime mortgage rates differ from provider to provider and depend on your age, but an average LTV is between 25 and 35%.
Drawdown lifetime mortgages are a lifelong commitment. In cases where a homeowner decides they would like to exit the deal early, the mortgage holder will incur an Early Repayment Charge.

These mortgages have fixed interest rates which will roll-up for life. The interest rates, therefore, cause debt to increase quickly.
While you have a drawdown lifetime mortgage, you will not be able to take out any other loans secured against your home. If you have any outstanding debts of this type at the time of application, you must use the money you release to pay them off.
There are additional costs involved in the application process. This is because the resident must seek professional advice, and may need to arrange for things such as a valuation of the property that the loan will be secured against.
You can look at alternative options, such as those from readysteadysell and compare cash offers for a home, if you do not fancy doing drawdown.

What is an enhanced lifetime mortgage?

An enhanced lifetime mortgage has lending criteria based on your personal health. If you are in poor health, you can borrow more.

Both a lump sum lifetime mortgage and an enhanced mortgage with a drawdown cash facility are available across different providers.

Sometimes you will also receive a lower interest rate than in a standard lifetime mortgage equity release scheme. But this is not a general rule and some enhanced lifetime mortgage plans actually have higher rates.

To determine your eligibility for an enhanced equity release plan, you will be given a health and lifestyle questionnaire to complete about your medical records. In the application, you will typically be asked about factors such as:

The prescription medication that you take.
Any medical problems that you have. For example, diabetes, heart attacks, strokes, Parkinson’s disease, multiple sclerosis or cancer.
Your blood pressure and BMI.
Whether or not you smoke.
Whether you retired early as a result of ill health.

If you are found to be in ill-health, the lender will grant you the ability to release more equity from your property or they may be able to look at a mortgage holiday of some sort.

This is because ill-health is considered to reduce life expectancy. So, the provider recognises you may have a shorter mortgage term than other borrowers. Therefore, this should be considered alongside any life insurance that you may have.

You will still be protected by the Equity Release Council’s no negative equity guarantee, even though you are borrowing a larger amount.

Homeowners should always speak to a financial adviser for professional advice before making any decisions about which equity release plan is right for their situation. Finances advisers can also talk you through any additional fees you might encounter, such as valuation or legal fees.

Are there any alternatives?

Before you make a choice about whether a drawdown lifetime mortgage is right for you, it’s important to consider alternative options.

Home reversion plan

Home reversion plans are a type of equity release where a share of your house will be sold to a lender in exchange for a cash lump sum or regular payment into your bank account.

The sale will be at less than the true property value, but, you remain living in your home without having to pay rent.

Interest only mortgages

Interest-only lifetime mortgages in retirement are a kind of equity release where you pay interest. The homeowner or homeowners will receive an initial lump sum, and then be required to make interest payments for the duration of the mortgage term.

You may need to provide your retirement income details when you apply to prove that you can afford the monthly interest rate.

Downsizing

Another alternative is toconsider downsizing your residence. By selling your previous home and moving into a smaller property, you will be able to release money via the proceeds of the sale.

You can then use this money to make home improvements or pay off debt, just as you could with a lifetime mortgage, without impacting your tax position or means-tested benefits.

Moving into a smaller place may also help reduce costs such as energy bills, saving you cash in the long term. This way, you will also be able to leave your home to your estate as an inheritance.