The most popular type of lifetime mortgage - drawdown plans offer a flexible approach to equity release. Rather than releasing equity from your property in one lump sum, drawdown lifetime mortgages allow you to borrow in smaller chunks over time.
Anytime after the plan has been set-up, you can then choose to withdraw additional funds (typically a minimum of £2,000) via a ‘drawdown request’ to your lender. This is a simple process and the funds are then sent to your bank account – usually within 2 weeks.
This is done by creating a cash reserve facility from which you take a minimum initial lump sum (usually £10,000). Your remaining funds are then held ‘in reserve’ for you by the lender - importantly accruing no interest and is a major feature of drawdown schemes.
There are no costs associated with making further drawdowns. All costs are borne at inception, and there are no further valuation or legal requirements. You can make as many drawdowns as you like, subject to using the remainder of your cash reserve facility.
As with all lifetime mortgages, the lender takes into consideration the age of the youngest homeowner, the value of the property and where you live in the UK, in order to calculate the maximum cash facility they will offer on a drawdown lifetime mortgage.
Age is an important factor as the older you are, the more you can borrow with drawdown lifetime mortgages. Additionally, health can play an important role. If you have a history of poor health, lenders can enhance (increase) the size of your drawdown facility.
Using the calculator above, you’ll get a rough idea of the maximum you can borrow with a drawdown lifetime mortgage.
The money in your cash facility is yours to spend as you please. You can make withdrawals at any time, usually subject to a minimum drawdown amount of £2,000, without incurring extra costs.
You do have a choice. However, if no payments are made the amount borrowed, plus accrued interest is repaid when you die or move into long term care.
Borrowing in smaller ‘chunks’ over time will actually reduce the final balance to be repaid. The reason being - interest is only charged on the amount borrowed, not whilst in a cash reserve.
Like any residential mortgage, you always remain 100% the legal owner of your home. The lender has a first legal charge on the property, so upon sale, they receive the outstanding balance first.
Taking larger sums of money could affect your eligibility for means-tested benefits. However, by using a drawdown plan and taking smaller amounts regularly, you are less likely to lose any means-tested benefits you can claim.
As drawdown is a release of capital, upon receipt of funds, the money is yours to spend as you wish – tax-free.
Meeting Equity Release Council gudelines, you have the peace of mind knowing that when your plan is finally repaid, your loved ones will never be out of pocket.
In extreme circumstances, usually in adverse economic conditions, the lender does retain the right to withdraw access to money in your cash reserve facility. One lender currently offers a guaranteed 15-year drawdown facility.
Any future drawdown from your cash reserve will be at the interest rate applicable at the time of withdrawal. This could be higher or lower than any previous drawdowns taken. No lender currently guarantees the interest rate on future drawdowns.
Regardless of how much equity is tied up in your property, some lenders will cap the size of their maximum cash facility. This can limit the amount of additional equity you can release.
If you need a large initial sum of money for a ‘big ticket’ expense (such as a house deposit for your children) then a lump sum lifetime mortgage could better suit your needs. Drawdown lifetime mortgages tend to be for smaller and regular withdrawals of cash.
As drawdown lifetime mortgages are designed for the long term, if you repaid your drawdown scheme early, you may be subject to a penalty. These early repayment charges could be as high as 25% of each amount borrowed, however depending on your equity release provider they could also taper over a fixed number of years.
Once the cash reserve facility has been fully utilised, you will need to reapply for a further advance. This would incur extra expenditures, such as a re-valuation and fresh application fees.