The drawdown lifetime mortgage scheme is a form of lifetime mortgage which has proved to be the most popular plan in the equity release market today. The reason being is the drawdown lifetime mortgage’s flexibility in being able to control how much equity to release, and when. This ultimately has a bearing on the final balance & important for all beneficiaries concerned.
The principle behind drawdown lifetime mortgages
The drawdown equity release plan was designed in response to the inflexibility of older equity release plans whereby you needed to take all the tax-free cash from inception. Instead, the drawdown plan still provides the same available cash amount, as they base the amount borrowed on age and property valuation.
However, this lifetime mortgage drawdown plan allows you to take a smaller initial lump sum, but leave the remaining funds with the equity release lender. The benefits of this technique is that interest is only charged on funds withdrawn, not on the monies left in the cash reserve facility. This smaller balance will result in less interest being paid over the longer term, saving the estate £1000’s.
Taking additional drawdowns
Once the initial cash lump sum has depleted, there is the option to recontact the lifetime mortgage drawdown provider & ask for a further tranche of money from the cash reserve facility. As the plan has already been set up, NO revaluation of the property is required at this stage. The original valuation still stands & calculations based thereon. The amount taken should again be sufficient to cover immediate spends to be incurred & be within the reserve funds still remaining.
Some lenders, such as Aviva & Hodge Lifetime will allow just £2,000 to be withdrawn from the reserve & this usually incurs NO admin fees, or requirements for an equity release solicitor to be involved again. The drawdown lifetime mortgage interest applicable to further drawdowns could have a different interest rate applying. The reason being that on each tranche, the interest rate applicable at that time is applied to the new release of equity.
Once the lenders paperwork has been completed, the money is then paid directly into your bank account, the process usually taking only a matter of a few weeks. Thereafter, on the scheme anniversary, the lender will send the annual equity release mortgage statement showing each tranche of money taken, applicable interest rate & the balance applying to each part.
Means tested benefits work in tandem with drawdown plans
Due to the flexibility of these drawdown equity release schemes, they can be utilised to manage the savings element of anyone on means tested benefits. Therefore, should anyone on pension/savings credit or council tax reduction (formerly council tax benefit) be reticent about taking equity release due to loss of such benefits, can now be rest assured. By using drawdown, the amount borrowed can be managed to keep within the benefit limits, with no loss of income.
Advantages of drawdown lifetime mortgage schemes
The best features of equity release drawdown schemes can be summarised as both money saving & increased flexibility compared to lump sum lifetime mortgages. To summarise the additional benefits are as follows: –
- The cash reserve with drawdown capabilities allows future withdrawals to become available, whenever additional finances are required
- By taking the tax-free cash in stages, this will preserve equity within the home & ensure less interest is charged over the long term
- Interest is only charged on funds withdrawn, not any monies remaining with the drawdown lifetime mortgage provider
- Being a form of lifetime mortgage, the flexible drawdown scheme ensures you retain 100% property ownership
- Funds can be taken in minimum amounts of £2,000 a time and incur no additional administrative expenses
- Processing times for further equity release drawdowns paid into your bank account are usually completed within a 2 week period
Disadvantages to drawdown lifetime mortgage plans
Albeit there are many positives to these drawdown equity release schemes, there are aspects to them that potential mortgage applicants should be made aware of: –
- In some instances, equity release companies may only guarantee the reserve for a maximum of 15 years
- Some drawdown mortgage schemes will limit the size of the cash reserve facility. In such instances, lenders could limit the reserve facility to twice the size of the initial release
- Should an extreme economic downturn arise, certain lenders have the right to withdraw the reserve facility at their discretion
- Whenever further withdrawals are taken from the reserve, they will be charged at the interest rate applicable at that time. This could be higher or lower than the original advance taken.
- Taking cash advances in stages will result in different tranches of money potentially having different starting levels for calculation of early repayment charges
- Upon expiry or exhaustion of the cash in the reserve facility, if further funds are needed a further advance application would be required & associated costs met
For personal advice on equity release drawdown schemes, please contact the London Equity Release advice team on 0800 471 4842.
Please visit the London compare deals table for a comparison of all the latest drawdown deals and lifetime mortgage interest rates.
…or if you wish to calculate how much you could potentially release, use the FREE London Equity Release Calculator.
These are drawdown lifetime mortgages. To understand the risks & benefits, please request your own personalised Key Facts Illustration