Home / Equity Release / Drawdown Lifetime Mortgages

Drawdown Lifetime Mortgages

Taking out a lifetime mortgage can help homeowners fund their retirement, using the equity built-up in their property.

Releasing equity in stages is known as ‘drawing-down’. Read on to find out how drawdown lifetime mortgages work.

What is a Drawdown Lifetime Mortgage?

Like a lifetime mortgage, you are taking out a loan from the equity built-up in the property you own. With these deals, you are agreeing to a certain percentage that will be given up at final sale, when both you and your partner either die or go into permanent care. You may choose to withdraw the funds as a lump-sum or as small regular payments, to provide you with a steady income.  This is what is known as a ‘drawdown’ lifetime mortgage.

Am I Eligible for a Drawdown Lifetime Mortgage?

• It is likely that you will have to be over the age of 55 and be a UK homeowner.
• If you have dependents still living with you, you may be turned down by some lifetime mortgage providers.
• Your property should be valued at over £70,000 to be considered for a mortgage of this type, in many cases.
• If you have any outstanding mortgage left to pay on your property, the lifetime mortgage loan funds must first be used to pay off the mortgage in full.

How is a Drawdown Lifetime Mortgage Repaid?

With a lifetime mortgage of this type, you only pay interest on the funds that are drawn down with each instalment. Using this method, you can reduce the amount you pay in interest at the end of the lifetime mortgage, as you are only withdrawing funds in small amounts.

The drawdown lifetime mortgage term is concluded when both you and your partner dies or goes into long-term care. When this happens, your named beneficiaries will be responsible for arranging the property sale and settling payment with the mortgage lenders.

To find out more information about Equity Release, take a look at our guide.

Let’s Look at a Drawdown Lifetime Mortgage Example

Florence and Sidney have chosen to take out a drawdown lifetime mortgage which they can take further funds from, as and when they need a little extra cash. They have agreed on a maximum loan of £64,000, over 15 years, and the interest rate charged will be 6.1%. If they had taken the full lump sum at the start they would have owed a total of £155,565 at full term. However, over 15 years, they withdrew the money in smaller instalments. Doing this saved them money in interest payments and at the end of the mortgage term, their family paid back the debt of £117,388, made up of the sale proceeds from the couple’s home.

What are the Benefits of a Drawdown Lifetime Mortgage?

• Lower Interest Payable – If you agree a maximum lifetime mortgage amount and only withdraw part of the money, you may pay less in interest payments overall.  This also means that the beneficiaries of your will could possibly inherit more.
• Flexibility – The drawdown option offers flexibility to customers. If you find that you are coping with the lump-sum you have already drawn down, there may not be a need for you to withdraw further funds.
• Retirement Planning – If you would like to go on holiday, or help your children with a deposit to buy a home, a lump-sum payment can provide you with the necessary funds.
• Inheritance Protection – Under many agreements with reputable providers, you could reserve inheritance funds for your will beneficiaries, with the Equity Release Council’s ‘Inheritance Protection Guarantee’. This means that your family will know the amount expected back at the end of the mortgage deal.

What are the Pitfalls of a Drawdown Lifetime Mortgage?

• Higher Interest – Every time you draw-down money, you owe interest on only the amount that is withdrawn (payable at the end of the mortgage term). Interest costs on lifetime mortgages are also considerably higher than with most typical mortgage loans. This is due to the risk they pose to providers, in that they may see no money returned to them for years. It is also worth noting that the interest charged on a second drawdown may be higher than the first lump-sum. The amount charged in interest is also subject to change.
• Drawdown Withdrawn – Some providers may not permit you to drawdown further funds in the future. This will depend on the maximum loan and the amount you have left in built-up equity.
• Early Repayment Charges – If you wish to pay off the loan in full, you may be subject to early repayment charges.
• Means-Tested Benefits – You may lose your entitlement to some state benefits. However, these entitlements will be outlined for you in detail, when you sign up for the agreement. So, you will know these changes in advance, provided you go through a reputable equity release company.

What are the Alternatives to a Drawdown Lifetime Mortgage?

• State Benefits – You could supplement your retirement income using state benefits. To find out if you are claiming for everything you are eligible for, check with your local Citizen’s Advice Bureau.
• Downsize – To raise some money, you could sell your home and move into a smaller place. This is the most cost-effective way of ensuring that you gain the maximum benefit from your fully paid off mortgage on a previous home.
• Work Part Time – If you are looking for a steady income after retirement, you may be able to find some part-time work.
• Home Reversion Plan – This is an agreement where you sell off all or part of your home to a reputable Home Reversion Plan provider.
• Interest Only Lifetime Mortgage – You can also reduce the amount of interest you owe on a lifetime mortgage, by looking at some interest only options. This will allow you to pay back the interest owed each month, effectively ‘ring-fencing’ your inheritance for your loved ones. Alternatively, if you have a pre-existing medical condition, you may be eligible for an enhanced lifetime mortgage.

Take a look at our Equity Release Frequently Asked Questions for more information on releasing equity from your home.

With any equity release product, it is highly recommended that you first consult a reputable financial advisor and be clear of the potential risks involved. You can get in touch with a specialist mortgage advisor here and get a free no-obligation quote.