Drawdown Lifetime Mortgages
Drawdown equity release is a great way to supplement your retirement income without paying crazy interest rates.
Looking forward to a comfortable retirement but struggling for cash?
Did you know that you need an income of £33,000 per year to retire comfortably?
Perhaps a drawdown equity release plan could be the solution if you’re not sufficiently prepared!
Fortunately, we are here to guide you through this process. We have researched the ins and outs of drawdown equity release to help you understand how it all works.
As experts in our field, we discuss the following in this article:
Our editorial team at EveryInvestor believes that everyone deserves a stress-free retirement, so we’ve thoroughly researched drawdown equity release plans to help you accurately and adequately plan for your future.
Let’s take a look.
Before You Start Reading….
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What Are Drawdown Equity Release Plans?
Drawdown equity release plans are a type of retirement mortgage that enables you to unlock cash from your home and access it in a series of small withdrawals rather than one lump sum.
You’ll receive an initial once-off lump sum followed by an approved cash facility that you can ‘draw’ from to top up your pension income as and when you need it.
Drawdown equity release plans, also known as flexible drawdown mortgages, are increasingly popular as they allow you to access your money with more flexibility than traditional mortgages.
How Do Drawdown Equity Release Plans Work?
Drawdown equity release plans work by giving you, the homeowner, complete control over how much money you want to access from your drawdown facility at a time.
Once you and your chosen provider have decided on the total amount of money you can borrow, you will receive an initial lump sum to start.
They will keep the rest of your money in a cash reserve facility which you can access as and when you need to.
What’s the catch?
These drawdown plans are a type of equity release. So you would have to be a homeowner over 55 to apply.
There is also a minimum amount that you must take upfront (usually around £10,000) and a minimum amount that you can withdraw at a time (usually £2,000).
On the plus side
There are no monthly repayments, and they only add interest to the money you draw, not the entire plan amount.
Why Choose a Drawdown Equity Release Plan?
You should choose a drawdown equity release plan if you are a homeowner over 55, looking for a means to supplement your retirement income1 regularly.
Drawdown equity release plans are a brilliant solution if you are looking for an extra source of income later in life as:
- You pay less interest than traditional mortgages.
- They offer flexibility as to when and how much you can withdraw.
- Some drawdown mortgages offer inheritance protection, ensuring that your loved ones will be left with an inheritance when you’re gone.
What Are the Advantages of Drawdown Equity Release?
The advantages of drawdown equity release plans are that they are more flexible than lump sum plans, and, unlike other equity release schemes, you can still maintain full ownership of your home.
Here are 5 reasons why more and more people are choosing drawdown equity release plans:
- There are no monthly instalments.
- You can spend the money you release on anything you choose.
- You can opt for the no negative plan guarantee, leaving your family debt-free.
- The money you choose to release is tax-free.
- You only accrue interest on the money you release and not the total sum in reserve. Saving you a considerable amount of interest!
What Are the Disadvantages of Drawdown Equity Release?
The disadvantages of drawdown equity release would be that you are only eligible to receive cash for a certain percentage of your property’s market value, and if you pay off your loan earlier, you may face significant early repayment charges.
Here are 5 disadvantages of drawdown equity release that you should consider before deciding:
- The money you withdraw will be at the interest rate applicable at that time, potentially making it more than your initial lump sum.
- Once you pass on or permanently move into long-term care, your loan provider will sell your house. Meaning you cannot leave it to your beneficiaries.
- You no longer have the primary legal charge on your property. When the property is sold, the loan provider will be repaid first, and what’s left will go to your beneficiaries.
- It may affect your right to means-tested benefits.
- Once you have spent the initial reserve, you will be required to complete an additional borrowing application after, once again, seeking advice from an advisor.
How Do You Get a Drawdown Equity Release Mortgage?
To get a drawdown equity release mortgage, you need to fit the criteria.
As with other equity release plans, you need to be at least 55 years old and own a home within the UK to the value of £70,000.
Tick all the boxes?
The next step you need to take is speaking to a financial advisor.
They will be able to help you decide if a drawdown equity release mortgage is right for you or if you should consider other alternatives.
How Much Money Can You Release?
The amount of money you can release will be based on your age, your property value and, in some cases, your health condition, but this will be agreed on with your provider upon application.
All plans come with minimum withdrawal amounts.
These can vary depending on the equity release provider you choose, but it’s usually a minimum of £10,000 for the initial lump sum and £2,000 for any further withdrawals.
There is also an option to receive set amounts regularly to add to your retirement income.
It’s essential to compare drawdown providers to find the deal that works in your best interest.
Before You Continue Reading….
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How Much Money Can You Have in Reserve?
You can have an uncapped amount of money in reserve with most drawdown plans.
Some plans only allow you to keep a percentage (usually between 50% – 150%) of your money in reserve based on the amount of your first lump sum.
How’s Your Reserve Calculated?
Your reserve is calculated according to your age, health condition, and property value.
The older you are, the more money you can loan.
Lifestyle choices (such as smoking) also affect the amount available.
If you are a smoker or have certain health conditions (such as high blood pressure or diabetes), you are eligible to loan more.
How Do You Access Money Held in a Reserve Facility?
To access money held in a reserve facility, you need to contact your lender.
The lender will provide you with an offer document (similar to the original borrowing documents) stating the loan terms and the amount they can offer you.
Once you have signed and returned the form, the lender will deposit the money straight into your bank account.
The entire process usually only takes a couple of weeks.
What Happens When You Don’t Have Any Reserve Facility Remaining?
When you don’t have any reserve facility remaining, you can access additional funds by moving onto an alternative plan.
You will still be able to add a reserve facility to the new plan with the help of an equity release advisor.
How Much Does a Drawdown Equity Release Plan Cost?
A drawdown equity release plan costs between £1,500 to £3,000 plus your compound interest.
You will be charged a fixed interest on each sum you borrow.
However, interest rates often vary, so it is vital to seek financial advice from an advisor before deciding.
You will also need to consider the following costs:
- Administrative fees
- Set up fees
- Valuation fees
- Solicitor fees
- The effect the plan might have on any means-tested benefits you receive
When Do You Repay Drawdown Equity Release?
You repay drawdown equity release once you go into permanent care or pass away. The drawdown provider will then sell your home and use the money from the sale to repay your mortgage.
Some drawdown plans allow you to gradually pay off the interest and a portion of your loan or all at once to reduce the mortgage cost.
Which Lenders Offer Drawdown Equity Release?
All mortgage lenders offer drawdown equity release.
These include familiar names, such as:
- Canada Life
- Pure Retirement
They may structure their packages in different ways, but in all instances, you will only incur interest on the money you choose to release and not on the total amount in your reserve.
Here’s a few examples:
|HODGE||The flexible lifetime mortgage (fee-free)||4.12%||Fixed|
|Canada Life||Prestige Options Flexi||5.37%||Fixed|
|HODGE||Flexible lifetime mortgage||3.98%||Fixed|
How Should I Choose a Drawdown Equity Release Provider?
You should choose a drawdown equity release provider with the help of a financial advisor.
They will help you find the correct provider according to your specific requirements and personal situation.
The amount of tax-free cash you will need also plays a role.
There are many providers to choose from, and they all have various packages and interest rates.
You can do the research yourself, but you must seek professional advice because of the risks involved and the complexity of these drawdown plans.
Made your decision?
Before signing any papers, do a detailed check on the company you’re favouring:
- Ask questions
- Check for online reviews & impartial testimonials
- Ensure the company is FCA approved (you can check the financial services register).
- Are they a member of the equity release council (ERC)?
What’s the Best Equity Drawdown Plan?
The best equity release drawdown plan will ensure that your best interests are always protected.
Make sure you look for a flexible provider with low early repayment charges and has low-interest rates.
A qualified equity release provider will help you with this decision and explain precisely how it all works.
Do Drawdown Equity Release Plans Affect Means-Tested Benefits?
Drawdown equity release plans are less likely to affect means-tested benefits² than other schemes.
The Department of Work and Pensions³ (DWP) and local authorities have set bank saving limits.
It’s essential to ensure that no balances are breached by a release of equity, as this may affect your eligibility for certain means-tested benefits.
You can tailor your drawdown equity release plan to adhere to these limits.
By following the guidelines set by the DWP, you can prevent losing any means-tested benefits you already claim when you take out equity release.
Once again, make sure you speak to a financial advisor before deciding. They will provide a complete evaluation of your circumstances.
Do Drawdown Plans Cost More Money than Lump Sum Plans?
Drawdown plans do not cost more money than lump sum plans.
They are more cost-effective as you only pay interest on the money you withdraw and not the total amount in your reserve.
What’s the difference?
While you still pay interest on the drawdown plan, you will pay less compound interest for the policy duration than any other traditional mortgage.
Not only is a drawdown plan more affordable than a lump sum plan, but they are also a lot more flexible.
Allowing you to manage your finances accordingly so that it does not affect your means-tested benefits, and by paying less interest, you’ll be able to leave more money behind for your beneficiaries.
Is Drawdown Equity Release Right for Me?
Drawdown equity release is right for you if you are a homeowner over 55 looking for a flexible way to access regular or occasional extra funds to add to your retirement income.
It’s a great way to access additional, tax-free cash without running up hefty interest costs.
However, borrowing money is different for everyone, and it depends entirely on your circumstances and needs.
Is Tax Payable on Drawdown Lifetime Mortgages?
No, tax isn’t payable on drawdown lifetime mortgages.
You aren’t required to pay Capital Gains Tax (CGT) or income tax on a drawdown lifetime mortgage.
Why? Because the money you’re borrowing isn’t an income or profit on the sale of an asset, but a loan against the value of an asset.
Can I Move House With a Drawdown Lifetime Mortgage?
Yes, you can move house after taking out a drawdown lifetime mortgage.
The property you move to must be of equal or higher value and considered by your lender to be a suitable alternative.
Is Drawdown Equity Release a Bad Idea?
Whether drawdown equity release is a bad idea depends entirely on your unique circumstances.
That’s why it’s crucial and a legal requirement to speak to a qualified financial advisor before committing to a plan.
Why Choose a Drawdown Lifetime Mortgage?
The top 5 reasons to choose a drawdown lifetime mortgage are:
- It gives you more flexibility.
- You pay less interest.
- It’s less likely to affect your benefits.
- There are no monthly repayments.
- You still own your home.
What’s a Drawdown Facility?
A drawdown facility allows you to access money from a reserve as and when you need it.
Drawdown equity release plans are a lifelong commitment and not to be taken lightly.
A drawdown lifetime mortgage is excellent if you fit the criteria (being a homeowner and UK resident over 55).
It allows you the flexibility to access extra money as and when you need it.
It’s convenient as you can release funds from your home without moving, but it comes with consequences.
Whatever your circumstances, make sure you speak to a qualified equity release adviser to discuss your options.
How Much Can You Release?
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Editorial Note: This content has been independently collected by the EveryInvestor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.