Drawdown Lifetime Mortgage

Drawdown Lifetime Mortgage

Drawdown Lifetime Mortgages are becoming a popular way of releasing equity from your property because they provide a high degree of flexibility when compared to other equity release products. A Drawdown Lifetime Mortgage allows you to be in charge of how much equity to release from your home, and when you do it.

The basis of a Drawdown Lifetime Mortgage is the same as all other methods of equity release: you release money from your home in the form of a loan which is paid back when you move out of the home to go into care or die.

What Is A Drawdown Lifetime Mortgage?

The difference between a Drawdown Lifetime Mortgage and a traditional Lifetime Mortgage is the way you take your money and, accordingly, the way your interest is charged:

Traditional Lifetime Mortgage

A traditional Lifetime Mortgage provides you with one lump sum in exchange for equity in your home.

Drawdown Lifetime Mortgage

A Drawdown Lifetime Mortgage provides you with tax-free cash that can be draw by you when you want. There are two key benefits to this type of equity release scheme:

  1. You only take the cash that you need.
  2. You only pay interest on the cash that you have drawn-down.

How Does A Drawdown Lifetime Mortgage Work?

A Drawdown Lifetime Mortgage facility works like this:

  • Your Drawdown Lifetime Mortgage provider will set up your draw down facility based on your age or the age of the applicants if more than one person applies. It is common for a husband and wife to apply.
  • You now have the choice of when to withdraw money from your draw-down facility. You might have plans to travel, or treat your children/grandchildren, or carry out some home improvements. The key thing to remember is that you can withdraw cash when you need it for each spending requirement and you will only incur interest charges on the amount you have actually withdrawn.
  • When you need to withdraw more money, you will need to contact the provider of your Drawdown Lifetime Mortgage and submit a drawdown request form. The form will contain information about how much more you want to withdraw, and there are no restrictions placed on the frequency of your drawdowns: you have complete control over when you take the money. After all, it is your money!
  • You can continue to withdraw money from your Drawdown Lifetime Mortgage until all the funds are used.

Pros and Cons of Drawdown Lifetime Mortgages

The advantages and disadvantages of a Drawdown Lifetime Mortgage are:

Advantages Of Drawdown Lifetime Mortgages

Here are the advantages of taking out a Drawdown Lifetime Mortgage:

  • Lower interest payments are incurred because interest is only charged on the amount of money you withdraw. This compares favourably with a conventional Lifetime Mortgage where interest will be calculated on the whole lump sum.
  • There are no monthly payments required like a traditional mortgage because the interest is ‘rolled-up’ and is paid when the whole loan is paid-off when your home is sold. This means you do not have to plan for monthly mortgage payments.
  • The creation of the drawdown facility means you will be able to make cash withdrawals when you want.
  • Drawdown Lifetime Mortgage Plans are regulated by the Financial Conduct Authority (FCA) and so you will afford a degree of safety if you engage with an FCA authorised and qualified provider.
  • You do not have to leave your home in order to release money from it.
  • The age criteria for Drawdown Lifetime Mortgages starts from age 55 onwards.
  • One of the risks of equity release products is that the money you release can result in the loss of any means tested benefits you received. A Drawdown Lifetime Mortgage enables you to control how much money you have available and therefore avoid the loss of benefits through careful planning.

Disadvantages Of Drawdown Lifetime Mortgages

The disadvantages of taking out a Drawdown Lifetime Mortgage are:

  • The interest that you will pay when your home is finally sold is compounded and so a small sum at the outset might grow into a large one when the loan is repaid. This means there is likely to be less money left in your estate when you die.
  • Some lenders place restrictions on the size of the drawdown facility that is available to you based on the initial amount of tax-free cash that you take.
  • The amount of money you are able to borrow through a Drawdown Lifetime Mortgage is likely to be less than you can borrow through other equity release methods such as a Home Reversion Plan, or conventional Lifetime Mortgage.
  • If you use up all the money in your draw down facility but need to release more money from your house, you might be restricted by the potential size of the loan that is outstanding. This means that potential lenders are likely to refuse more equity release.
  • There is no guarantee to the use of your draw down cash facility, even though it may been agreed in principle with a provider.