What’s a Drawdown Lifetime Mortgage and How Does It Work in 2024?

Discover the Benefits and Risks of Drawdown Lifetime Mortgages. Find Out if This Flexible Equity Release Option Is Right for You.
  • Last Updated: 05 Feb 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.

Contributors:

Francis Hui

Key Takeaways

  • A drawdown lifetime mortgage is a form of equity release where you get a lump sum and an approved 'cash reserve' that you can make money from as needed.
  • In the UK, it allows homeowners over 55 to borrow against their home's value and take smaller amounts as required, with interest only accruing on the funds drawn down.
  • The advantages include flexible access to funds and lower interest costs, while the disadvantages include potential impacts on benefits and inheritance.
  • After 65, it could be a good idea if you need a flexible source of income, but it's critical to consider your long-term financial needs, as well.
  • The tax implications of a drawdown lifetime mortgage in the UK are generally favourable, as the money released is tax-free, but it can affect your entitlement to means-tested benefits.

If you’re a homeowner in the UK over the age of 55, and looking to live a comfortable retirement, then the flexibility and convenience of a drawdown lifetime mortgage may be right for you.

Based on the data provided by the Equity Release Council for the year 2022, there was a 16% increase in the number of returning drawdown customers, which is slightly lower compared to the 20% growth in new plans agreed upon. Conversely, the market for further advances, although smaller, experienced a significant 86% growth.1

In This Article, You Will Discover:

    What Is a Drawdown Lifetime Mortgage and How Does It Work?

    A drawdown lifetime mortgage is a unique home equity release scheme that enables homeowners, typically over 55, to borrow money against their house's value while retaining ownership.

    It's distinct because the funds are accessible in instalments, instead of a lump sum, providing financial flexibility. The total amount available to drawdown depends on property valuation and the age of the youngest homeowner.

    The way it works is quite straightforward. Interest is only charged on what you've withdrawn, not the total reserve, which can significantly reduce the overall cost.

    The loan, along with the accumulated interest, is usually repaid upon death or when moving into long-term care.

    We strongly advise seeking professional advice before proceeding; it's crucial to understand all implications as this decision will impact your estate's value and potential inheritance.

    How Do Drawdown Lifetime Mortgages Work in 2024?

    A drawdown lifetime mortgage is a unique home equity release scheme that enables homeowners, typically over 55, to borrow money against their house's value while retaining ownership.

    It's distinct because the funds are accessible in instalments, instead of a lump sum, providing financial flexibility. The total amount available to draw depends on property valuation and the age of the youngest homeowner.

    The way it works is quite straightforward. Interest is only charged on what you've withdrawn, not on the total reserve, which can significantly reduce the overall cost.

    The loan, along with the accumulated interest, is usually repaid upon death or when moving into long-term care.

    We strongly advise seeking professional advice before proceeding; it's crucial to understand all implications as this decision will impact your estate's value and potential inheritance.

    Every Investor has probed the market to produce this detailed guide to drawdown equity release in the UK, including how it works, the advantages and disadvantages, eligibility criteria, costs, and more.

    Take a look.

    What Defines a Drawdown Lifetime Mortgage?

    A drawdown lifetime mortgage is one of the different types of lifetime mortgage where you can initially receive a small lump sum payment, with access to the balance of the loan in stages when you need it.

    You also only pay interest on the amount you withdraw, rather than the total loan amount that’s placed in a drawdown facility.

    Additionally, the funds released are generally tax-free, but it's important to consult with a financial advisor or equity release broker to understand the potential tax implications and other risks associated with equity release.

    How Does a Drawdown Facility Function?

    A drawdown facility is a feature of a drawdown equity release plan that allows you to withdraw funds as needed, up to a pre-agreed limit. 

    The remaining funds are held in reserve for future use, subject to minimum withdrawal amounts and any other terms and conditions of the loan.

    How Does a Drawdown Equity Release Lifetime Mortgage Work?

    A drawdown equity release lifetime mortgage works by first determining whether you are eligible and finding the right plan and provider for your needs.

    A consultation with a professional equity release advisor or broker is a must to help you find the most suitable option for your circumstances. 

    If, with the guidance of your advisor or broker, you decide to proceed with a drawdown lifetime mortgage, you can process an application. 

    What’s the Application Process & What Documents Are Needed?

    The application process for a drawdown lifetime mortgage typically involves several stages and requires specific documentation. 

    Your advisor or broker will assist you throughout the process.

    Here's an outline of the process and the documents you'll need:

    • Initial consultation with a financial advisor or equity release specialist.
    • A complete application form, providing personal and property details.
    • Required documents: proof of identity, proof of address, proof of income, property details, and solicitor's details.
    • A property valuation to determine market value.
    • Receiving a formal mortgage offer if the application is approved.
    • The appointment of a solicitor to handle legal work.
    • Completion of the process, the release of an initial lump sum, and the set up of your drawdown facility.

    Explaining Each Step of the Drawdown Mortgage Process

    Equity release is a complex financial transaction and you’ll need the assistance of an independent equity release advisor or broker who can explain each step of the process to you.

    They’ll evaluate equity release products across the market and recommend one that will best suit your needs.

    The Equity Release Council (ERC) standards also require that you engage a solicitor, preferably one who specialises in equity release, who can walk you through the legal aspects of the process.2

    Who Is Eligible for a Drawdown Equity Release Mortgage?

    To be eligible for a drawdown equity release mortgage, you must meet certain criteria, including age and property value.

    What Are the Age & Property Value Requirements?

    The minimum age requirement for drawdown equity release is 55 years old and the property you own must usually be your primary residence in the UK with a value of at least £70,000. 

    What Other Criteria Determine Eligibility?

    If you do have an existing mortgage, it must be repaid with the proceeds from the equity release loan. 

    Additionally, you must use the loan for legal purposes, such as home improvements or paying off debts.

    There may be additional lender-dependent criteria.

    What’s the Maximum You Can Release With a Drawdown Mortgage?

    The amount of money you can release through a drawdown equity release plan will depend on several factors, including the value of your property, your age, the terms of your loan, and sometimes your state of health and lifestyle. 

    Typically, you can release a minimum initial amount and a maximum overall amount based on these factors.

    What Are the Minimum Withdrawal Amounts?

    Most providers have a minimum withdrawal amount that you can take from your drawdown equity release plan. 

    This amount depends on your plan, but it's typically around £2,000 per drawdown. 

    Certain providers may also require you to withdraw a minimum yearly amount in order to maintain the plan's active status.

    What’s the Maximum You Can Ideally Release?

    The maximum amount you can release depends on how much your property is worth and your age. 

    Lenders are likely to give you more if you’re older and your property is worth a lot. 

    Providers usually have a maximum loan-to-value (LTV) ratio that limits the amount you can borrow relative to the value of your property.3

    What Is the Maximum Reserve Available in a Drawdown Plan?

    The amount of money you can have in reserve with a drawdown lifetime mortgage varies depending on several factors, including the equity release provider's policies, the property's value, your age, and your health status. 

    Some plans only allow you to keep a percentage of the total amount you’re able to release in reserve. 

    This could be calculated in relation to the initial lump sum you release.

    How Is Your Reserve Amount Calculated?

    Your reserve is calculated based on the maximum overall amount you can release, minus the amount you’ve already withdrawn. 

    Some providers may also limit the size of your reserve based on your age and life expectancy.

    Other lifestyle factors may also come into play, such as whether you’re a smoker or have other health issues.

    How Can You Access Money Held in a Reserve Facility?

    To access the money held in a reserve facility, you’ll need to contact your provider and request a withdrawal. 

    They’ll send you an offer document, which you’ll need to sign and return.

    Your provider will transfer the money into your bank account, usually within a couple of weeks.

    What Occurs If Your Reserve Facility Is Depleted?

    When you don’t have any reserve facility remaining, you’ll no longer be able to access further funds from the equity release plan.

    You could contact an equity release advisor or broker to explore your options and see if you qualify for additional borrowing or whether you could take out a new plan with better features or a better rate. 

    Your financial advisor will review:

    • Whether you qualify for 1 of the new plans on the market, which may offer enhanced features.
    • The amount owed on your equity release plan and any interest accrued.
    • Any potential early repayment charges.

    What Are the Costs Associated With Drawdown Equity Release Plans?

    A drawdown equity release plan’s cost includes interest rates, fees, and other charges.

    Interest Rates

    Your plan and lender, as well as your loan-to-value ratio, will determine the interest rates applied to your drawdown mortgage.

    Remember, that interest is only charged on the money you withdraw from your reserve. By accessing your funds over time you’ll also be managing the effects of compound interest on your loan.

    Fees

    There may be fees for setting up the loan and releasing equity. 

    These can include: 

    • Advisor fees
    • Valuation fees 
    • Legal fees 
    • Arrangement fees

    Other Charges

    You’ll also have to consider other fees, such as early repayment charges and interest rates. 4

    When Do You Repay Drawdown Equity Release?

    With a drawdown equity release plan, you don’t need to make any repayments until you pass away or go into care. 

    At this point, your house will be sold and the loan amount and interest will be repaid from the sale proceeds.

    However, you can opt for a loan and monthly interest repayments.

    Why Choose a Drawdown Equity Release Plan?

    You should choose a drawdown equity release plan if you want to access your property equity in a flexible and potentially more cost-effective way, with the possibility of preserving some of the property value for your heirs. 

    However, it's important to carefully consider the potential impact on inheritance and other financial planning considerations and to seek professional financial advice before making a decision.

    What Benefits Does a Drawdown Equity Release Offer?

    The advantages of choosing a drawdown equity release plan include a flexible and convenient way to access the equity in your home, while also providing some degree of control and security.

    Let’s elaborate further:

    • You’ve got the flexibility of withdrawing funds as needed, which can help you manage your finances and avoid paying interest on money you’re not going to use immediately.
    • You’ve got the convenience of accessing funds quickly and easily, without having to go through the application process again. Note that the time it takes to access funds may vary depending on the lender and the specific terms of your mortgage.
    • It’s potentially cost-effective because you only pay interest on the money you’ve withdrawn, which may result in lower overall costs than a lump sum release, depending on interest rates and the frequency of withdrawals.
    • You’ve got control of the amount you withdraw, subject to the pre-agreed limit, lender's terms, and any potential fees or charges associated with withdrawals.

    What Are the Drawbacks of Opting for Drawdown Equity Release?

    The disadvantages of drawdown equity release that must be considered include interest rates, costs, a reduced estate, and access to benefits.

    What this means is:

    • Interest rates are typically higher than conventional mortgages, and interest is compounded over time if left unpaid, which means the amount you owe can increase significantly.
    • There are costs - set up, valuation, and solicitor’s fees - associated with releasing equity.
    • Your house will usually be sold upon your death and the mortgage repaid, which reduces the size of your estate.
    • Equity release can affect your eligibility for means-tested benefits.5

    How to Determine the Best Equity Drawdown Plan for Your Needs

    The best equity drawdown plan for you will depend on your individual circumstances and financial goals. 

    Before choosing a plan, it's important to consider your financial needs as well as your eligibility, the costs associated with the loan, and the terms and conditions of the loan.

    It's also important to seek independent financial advice before applying for a drawdown equity release plan. 

    A financial advisor can help you understand the costs, risks, and benefits of drawdown equity release, and can recommend a plan that meets your needs.

    Identifying Lenders That Offer Drawdown Equity Release Plans

    There are quite a few lenders that offer drawdown lifetime mortgages in the UK. 

    Some of the most well-known providers include:

    • Aviva
    • Legal & General
    • LV=
    • Pure Retirement
    • Hodge Lifetime
    • Canada Life
    • Just Group
    • Retirement Advantage

    It’s important to note that the terms and conditions of these products may vary, and it’s recommended that you seek professional financial advice before choosing an equity release provider.

    Key Considerations Your Equity Release Advisor Should Discuss

    An equity release advisor should help you consider the costs, risks, and benefits of drawdown equity release, and ensure that you fully understand the terms and conditions of the loan. 

    They can help you compare different providers and choose a plan that meets your needs. 

    Additionally, your advisor should help you understand the impact of drawdown equity release on your inheritance and any entitlements to means-tested benefits.

    Frequently Asked Questions on Drawdown Lifetime Mortgages

    What Should I Consider When Choosing a Drawdown Equity Release Provider?

    Why Compare Drawdown to Other Equity Release Types?

    Can Drawdown Plans Affect Your Means-Tested Benefits?

    Are Drawdown Plans More Expensive Than Lump Sum Options?

    Is a Drawdown Equity Release Plan Suitable for Me?

    Are Taxes Due on Drawdown Lifetime Mortgages?

    Is Relocating Possible With a Drawdown Lifetime Mortgage?

    Is Drawdown Equity Release a Bad Idea?

    What Are the Reasons to Opt for a Drawdown Lifetime Mortgage?

    What Are Drawdown Lifetime Mortgages?

    How Does a Drawdown Lifetime Mortgage Work in the UK?

    What Are the Pros and Cons of a Drawdown Lifetime Mortgage?

    Concluding Thoughts on Drawdown Equity Release in the UK

    There’s a lot to think about when you’re considering an equity release plan, including whether a drawdown lifetime mortgage suits your needs.

    While the flexibility and convenience of controlling access to your equity is a plus, it's also essential to understand the potential risks.

    We hope that this guide on drawdown lifetime mortgages will equip you with everything you need to make an informed decision.

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