Drawdown lifetime mortgage: How does it work?

If you’re considering equity release to access funds in your retirement, chances are you’ve come across drawdown lifetime mortgages. It’s essential that you choose the right product for your circumstances. So, to help you in that process, we delve into the benefits of a drawdown lifetime mortgage, how it works, and whether it’s the right product for you.

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What is a drawdown lifetime mortgage?

A lifetime mortgage is a loan product where you borrow funds against the value of your property while it remains within your possession. Usually, these funds are paid to you in a lump sum. A drawdown lifetime mortgage works this way precisely, but instead of a lump sum payment, you opt to receive the funds in instalments.

This makes the drawdown option more flexible since you can access your funds whenever you like and as often as you like. To be eligible, you need to meet specific requirements, including:

• Be at least 55 years old (some companies set the minimum entry at 60).
• Your property needs to have a value of at least £70,000.
• Your property needs to pass the lender’s assessment for future sale potential.

What are the benefits of a drawdown lifetime mortgage?

So, now you might be thinking – why would I choose not to receive the payment in one lump sum? Wouldn’t that be better for covering medical expenses or helping a loved one on to the property ladder? Well, if you need the funds to pay something like a mortgage, you’ll need the lump sum to put down as a deposit.

However, if you don’t need the funds all at once – if you’re looking to cover your retirement expenses, then a drawdown lifetime mortgage can be a more cost-effective option. This is because you only pay interest on the funds you take out.

Here are some other benefits to a drawdown lifetime mortgage:

• You retain ownership of your home and can benefit from any future increase in value.
• You don’t need to make monthly repayments.
• The funds you access are tax-free and can be used however you wish.
• Some companies will allow you to protect part of the value of your property from leaving an inheritance when you pass away.

Why should you opt for a drawdown lifetime mortgage?

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Unlike a standard lifetime mortgage, a drawdown option will allow you to access funds whenever you like. As mentioned before, this makes it an excellent cost-effective tool if you need funds but not all at once.

As a result, a drawdown lifetime mortgage is excellent for people that need short bursts of funds to cover retirement expenses, a holiday, the living expenses of a loved one, or medical costs.

A drawdown lifetime mortgage is also an excellent insurance policy for unforeseen future expenses, as you can leave it without having to pay interest until you need to access funds.

How much can you borrow through a drawdown lifetime mortgage?

The amount you can borrow will depend on the value of your property and also your age. Usually, you can borrow more if you’re older, but typically applicants choose to borrow between 25% and 30% against their property. This can be increased to 50% if you meet the requirements. Here’s an example to give you an idea of how much you can access:

• A 60-year old applicant with a property worth £200,000 could access £58,895 at an interest rate of 3.60%. The lowest interest rate plan would be £32,650 at 2.93%. On the other end, the applicant could access £72,000 at 6.32%.

Note that these estimates do not take into account an existing mortgage. If you already have a mortgage, your lender will need to use part of your drawdown lifetime mortgage funds to pay off your standard mortgage.

What are the risks of a drawdown lifetime mortgage?

As evidenced by this article, there are plenty of benefits to investing in a drawdown lifetime mortgage, but there are some downsides that you should bear in mind before making a decision.

• One con is that the size of your mortgage will likely grow due to the roll-up of interest.
• The amount of inheritance you plan to leave to loved ones will decrease each time you access funds.
• You might not be able to increase the amount of equity you have access to in the future.

As with getting a standard mortgage, it’s essential that you discuss your options with a professional advisor.

How to find a good drawdown lifetime mortgage deal?

To ensure you’re getting the best possible rates, you should shop around and compare quotes from multiple providers. You can also use a comparison engine or mortgage broker to search the market and find you a good deal, but note that not all lenders will offer a drawdown mortgage.

Can you pay a drawdown lifetime mortgage early?

A lifetime mortgage product isn’t designed to be paid off early. You usually pay it when you pass away or move into care. However, if your circumstances change and you’d like to terminate your contract, you can ask your lender to pay your drawdown lifetime mortgage early.

The issue is that most lenders will charge you an early repayment fee to recoup any losses they might have had from your contract. It’s crucial that you evaluate the cost of the early repayment fee and whether it’s worth terminating your contract at all.

Is it the right product for you?

Whether a drawdown lifetime mortgage is right will depend on your specific requirements. If you’d like cost-effective, easy, and flexible access to funds to cover retirement costs and other expenses, this type of product is perfect for you.

However, if you need a more considerable lump sum of money to cover a one-off payment, such as a deposit on a new property, you should probably go with a standard lifetime mortgage. Either way, you should always make sure to discuss your options with a qualified professional before making a decision.