Getting lifetime mortgage drawdown facility
You’ve given up work and are enjoying your retirement but would still enjoy the occasional top-up of extra cash – for some of the luxuries in life, by taking your dream cruise, for instance, or the ability to buy a new car every few years or so.
Through lifetime mortgage drawdown, you can secure the benefit of additional cash as and when you need or choose it.
What is a drawdown facility on a lifetime mortgage?
A lifetime mortgage is one of the two types of equity release (the other is called home reversion).
A lifetime mortgage is a loan secured against the home you own, while home reversion involves the sale of a share in the ownership of your home in return for the equivalent cash. In both cases, you get to continue to enjoy the unfettered occupation of your home.
What’s more, in either case, you can elect to receive your cash payment either as a lump sum or in a series of drawn-down instalments – or a mixture of both.
How does drawdown equity release work?
Typically, a lifetime mortgage drawdown facility provides you with an initial, upfront payment of cash. At the same time, the balance of your equity release loan is transferred to a special reserve from which you may draw down further instalments of cash as and when you decide.
No interest is charged until you have actually drawn down the funds – so, you are not paying interest on the balance that remains in your special reserve. Avoiding any such accumulation of interest is a valuable feature of a drawdown lifetime mortgage.
Even when the cash has been drawn down and begins to attract interest, you can still elect to delay monthly repayments of that interest and instead allow it to roll over until the end of the equity release agreement (when you die or move into long-term care) when both the capital and accumulated interest are repaid through the sale of your home.
The lifetime mortgage drawdown facility provides you with funds you can withdraw at your leisure while continuing to enjoy all the benefits of continuing to live in the home you own.
Eligibility for a drawdown lifetime mortgage is similar to other variations of equity release. In other words, you will probably need to be over 55 years of age and own your own home as a UK resident, with the current market value of that home achieving a minimum level. The amount of equity release you may expect to achieve will vary according to a range of factors but will typically be up to 50% of your home’s current market value.
Also, read about getting an equity release on a retirement flat in our previous article.
What are the fees involved with a drawdown lifetime mortgage?
Different equity release plans typically involve different set-up fees – these might include your solicitors’ expenses, a valuation fee, and, in some cases, an application fee.
Once your equity release plan is set up, however, there is usually no charge for drawing down or withdrawing funds from your reserve – although your particular lender may set maximum and minimum amounts for any single withdrawal (as little as £500 at any one time, for example, rising to as much as £6,000 in some cases).
As we’ve mentioned, you do not pay interest until funds are drawn down or withdrawn. The rate of interest you pay on each withdrawal is then fixed.
Note that the rate can vary over time as you make successive withdrawals – so that you end up paying different rates of interest on different parcels of funds you have drawn down. Keeping track of those varying rates of interest can add an element of confusion about the repayments you make on your equity release plan.
How much money can you have in a lifetime drawdown mortgage reserve?
Sometimes, a single lump sum equity release plan will provide more funds than a lifetime mortgage drawdown facility – but there is no hard and fast rule because it all will depend on the lender you choose.
Once your drawdown facility is agreed upon, however, there is no theoretical limit to the proportion of funds you keep in your reserve. In other words, the reserve is uncapped and any funds still to be released can remain in that reserve.
Nevertheless, some lenders exercise a different approach and impose a limit on the funds kept on reserve – typically relating to a given percentage of the total loan agreed and the amount paid in the initial lump sum cash payment.
Can I put the maximum in the equity release drawdown mortgage reserve?
The interest rates you are charged may depend on the initial amount you withdraw and the balance you retain in reserve.
For example, you might pay more for the initial release of funds or might pay as much as double the rate of interest if you keep the maximum permitted amount in reserve.
How do you access money held in a lifetime mortgage drawdown reserve facility?
It is invariably very easy to draw down further instalments of cash from the reserve facility of your agreed equity release total.
This typically involves sending your request to the equity release provider who will set out the amount of funds offered and the conditions – including the rate of interest – attached. In other words, an offer very similar to the documents you will have signed when setting up your drawdown lifetime mortgage in the first place.
For drawdowns or withdrawals, however, you will not need the property valuation or legal advice that preceded the initial agreement, so – once you have agreed to the lender’s offer – each withdrawal can be made quickly, with the transfer of funds directly into your bank account typically within less than a month.
As with any equity release, a drawdown lifetime mortgage is not to be entered lightly and might not be the most appropriate financial solution for every homeowner. Read more about the pros and cons of equity release in the previous article.
To help you decide whether it is a suitable match for your own needs and circumstances, you might want to draw on the experience and expertise we can offer here at NeedingAdvice.co.uk.
FAQs – Lifetime Mortgage Drawdown Facility
What are the pros of drawdown lifetime mortgage?
There are many advantages of drawdown lifetime mortgage. Starting from the interest rate, which is usually lower than standard lifetime mortgages. The main advantage is that you can use the money from the drawdown facility whenever you like without having to wait until the end of the term. You can also make additional payments during the life of the drawdown.
Drawdown lifetime mortgages are often cheaper than standard lifetime mortgages. This is because they only require one application and one valuation. They are also easier to arrange because you don’t need to get a solicitor involved.
Drawdown lifetime mortgages are flexible and allow you to change how much you borrow at any time. If you find yourself struggling financially, you can increase the amount you borrow by making extra payments.
Drawdown lifetime mortgages are ideal for people who want to take their time in deciding what to do with their home. It gives them the opportunity to think carefully about how best to spend the money they receive.
Drawdown lifetime mortgages are good for those who want to leave their house to children or grandchildren. By leaving the house to someone else, you can avoid paying inheritance tax.
Drawdown lifetime mortgages are great for people who want to move away from their homes but still live there. For instance, if you are moving abroad for work, you could sell your home and then use the proceeds to buy a new home in another country.
What are the disadvantages of a drawdown lifetime mortgage?
There are also many cons of drawdown lifetime mortgage such as:
Equity release can reduce the value of inheritance and you will leave less money for your loved ones. Interest rates could be slightly higher as compared to so other types of lifetime mortgages.
Drawdown lifetime loans are not available in all areas. Some lenders may not offer this type of loan.
Drawdown lifetime loans are not always cheaper than standard lifetime mortgages, especially when you consider the cost of the valuation.
Drawdown lifetime mortgages are not suitable for everyone. If you are planning to move abroad, you should check whether you can access an equivalent product in your destination country.
Drawdown lifetime mortgages are not suitable for people who want to sell their homes quickly.
It is always better to consult a qualified advisor before starting your application.
How do drawdown equity release plans affect the means-tested benefits?
These equity plans are less likely to affect means-tested benefits when compared to other similar schemes. You can always contact me for financial advice before starting any such equity release application.
What are the types of equity release in UK?
There are two types of equity release in the UK. These are:
Home reversion plan – In this scheme, you will be able to keep living in your property even after it has been sold. However, you will no longer own the property.
Home retention plan – In this scheme, you will be able to continue living in your property while selling it.