What Is Draw-down Equity Release?
Drawdown equity release is a type of lifetime mortgage that enables you to control precisely when you take the money from your home, thereby reducing the amount of interest that you pay. However, it is like all other types of equity release product in that you do not have to move out of your house in order to make use of the money that’s tied up in it.
Understanding The Drawdown Principle
Lifetime mortgages work by agreeing a loan with a financial services company that is secured against your home. You don’t have any repayments to make and the loan is only repaid when your house is sold – whether that is for moving into a smaller home or moving into care, or when you pass away.
A lifetime mortgage plan that does not offer the draw-down option will give you a fixed lump sum or income. Interest will be applied at the outset and will be calculated on the total amount.
A drawdown lifetime mortgage will provide you with a facility that is capped at the amount you agree with your lender. For example, you might agree a total amount of £150,000. It is up to you when you access this money and you do not have to access it all at one time; you can take £20,000 and then use another chunk of money when you want. The key difference is that interest is only charged on the amount of money you have drawn-down. So, in this example, you do not pay interest on £150,000 – you pay interest on £20,000. If you draw down another portion of money, you will pay interest on the total amount you have taken but not on the total amount of your £150,000 facility.
You then continue to access your cash your drawdown facility has been used-up.
Taking out An Equity Release Plan
It is often the case that your retirement income will be less than the income you received when you were working. This has been the case in recent years where investment returns on pensions have been poor and the income that an annuity can provide has fallen to very low levels. Annuity providers have not been able to pay favourable rates because there have been increases in life expectancy and difficult market conditions that followed the financial crash.
Many retired people therefore find themselves in the position of not being able to work, and obtain mortgages, and having inadequate pension provision. This combination of factors has led to an increase in demand for Equity Release. If you are thinking about releasing money from your home, here are some things to consider:
Move House Instead?
Instead of taking out an equity release product, you could down-size to a smaller home and release money. This option might work out to be cheaper than taking out equity release but you will need to work out all the costs associated with moving and compare them to the costs involved with equity release. For example, you will need to pay for estate agent’s fees, solicitor’s services, stamp duty on the purchase of your new home, plus other expenses such as moving and refurbishment.
Talk To Your Family
Should shouldn’t make the decision to take out an Equity Release product by yourself. Make sure you talk to your family and other potential beneficiaries of your estate because equity release products are likely to reduce the amount of money they inherit when you die.
Talk To A Professional Equity Release Consultant
The Financial Conduct Authority regulates the provision of equity release products by ensuring that equity release consultants are fully qualified to give advice. A consultant will be able to provide you with all the options available to you, and tell you whether or not it is the most suitable way of generating income.
What To Ask Your Lifetime Mortgage Adviser
Taking out a Lifetime Mortgage is a big decision and so you need to make sure that this is the right form of equity release for you. Here are some questions that you should ask your Lifetime Mortgage adviser when discussing the scheme:
- What would be the effects of the money you receive from the Lifetime Mortgage on your state benefits? If you receive state benefits that are means tested (excluding the basic state pension) then you might find that the money you receive makes you ineligible to claim them.
- Does the scheme have a ‘No Negative Equity Guarantee’? If it doesn’t then you should find out why. A ‘No Negative Equity Guarantee’ was created by reputable equity release lenders to protect you and beneficiaries of your estate in the event that the value of your Lifetime Mortgage loan becomes than your home is worth. With a ‘No Negative Equity Guarantee’, there will be no liability to pay for the money that is owed.
- What are the conditions specified in order for you to continue living in your home? One of the key advantages of a Lifetime Mortgage is that it enables you to continue living in your own home for as long as you wish. However, the provider of your home will lay down certain conditions pertaining to the maintenance and upkeep of your property. You should find out the extent of these conditions, and ensure that you will be financially capable of honouring them. You might be eligible for a grant from the government or a charity that will help you pay for any home repairs you need, and your adviser should be able to find out the relevant information for you.
- Can you transfer the Lifetime Mortgage to another house if you move home? You might find that you wish to move to a different home in the future – perhaps a single-storey property or one with a smaller garden – and so you check that you are able to transfer your arrangement to the new house.
- What fees are payable when you take out the Lifetime Mortgage? Your adviser should be able to provide you with a full break-down of the fees you will need to pay, and these might include: valuation charge, adviser’s fee, solicitor’s charges, etc.
- What fees are payable if you soon after taking out the Lifetime Mortgage or within a few years? This is an important question to ask your Lifetime Mortgage adviser because there are likely to be charges which are added for early repayment.