Drawdown lifetime mortgage are the most popular form of equity release scheme available today. Designed over 7 years ago, they were innovated due to the rigidity of older equity release plans that offered a one stop shop scenario. Prior to drawdown equity releases, homeowners had to budget over the longer term & estimate how much capital they would need to last them.
This situation didn’t prove cost effective or really best advice, as it meant taking a larger lump sum than otherwise be needed & placing the excess future capital in the bank for later use. Leaving money in the bank does not attract as much interest as that being charged on the equity release plan, therefore this situation needed to be addressed.
Hence the evolution of the drawdown lifetime mortgage by the likes of Hodge Lifetime, Prudential Equity Release & Just Retirement. Understanding this gap in the market led to a rethink on how a release of equity can be achieved in a simpler & more cost effective way. This proved an immediate success & proved to be an inspirational moment in the growth of the equity release industry & building the trust factor back into the market.
How Drawdown Lifetime Mortgages Work
Drawdown lifetime mortgage schemes work by offering an upfront cash lump sum with the flexibility of a further cash reserve facility, which the homeowner is then able to withdraw over time, as & when, or even if required at all. These schemes are invariably a roll-up lifetime mortgage, which means there are no monthly payments to make, thus the interest rolls-up over the duration of the plan term.
The loan is repaid upon death, or the last survivor moving into long term care, at which point the property is usually sold with the proceeds paying off the lender. Any remaining balance passes into the estate of the homeowners & distributed in accordance with their Last Will & Testament.
Drawdown lifetime mortgages allow consumers to take only the funds they need out of their facility throughout their retirement in tranches to suit expenditure plans. For example, a person may have £30,000 available in their drawdown account. They take £10,000 for the first 12 months, but draw on the other £20,000 over the next 10 years for holidays, home improvements & supplement their retirement living.
How Much Can I Borrow On a Drawdown Lifetime Mortgage?
Most of the companies offering this type of lifetime mortgage require the homeowner to withdraw at least £10,000 initially as a minimum. There are a few companies that may require only the amount the consumer feels they might need for that time period. This is one point to check when you compare drawdown equity releases deals from company to company.
The amount of loan awarded in a drawdown facility is based on several factors: age, home value, ill-health and the percentage the homeowner wants to retain in equity for their beneficiaries id that is important.
Age: this determines the life expectancy of the homeowner, or joint homeowners. Life expectancy is used to calculate how long the equity release company will need to wait for full repayment of the loan. The longer the period of mortality, the lower the amount the lender will release as equity. The equity release company does not want to have to rely on using the no negative equity guarantee by lending too much, too young.
Home Value: property valuation determines the amount of equity to tap. The minimum property valuation acceptable across the whole of the equity release market is currently £60,000 with More2Life. Again, the higher the property valuation, the greater the amount of equity that can be released.
Ill-health: any health that may reduce the longevity of the homeowner is considered in order to increase the maximum loan to value percentage awarded to the consumer. Therefore, if the lender feels that the applicant’s health would be impaired, then they would lend a greater amount of tax free cash on the premise that the plan will not need to run as long.
Hence, drawdown lifetime mortgage provides offering enhanced terms can afford to release more funds from the outset, or with the enhanced drawdown equity release plans the size of the reserve facility would be increased to accommodate the ill-health effect. This would suit those looking for a maximum reserve facility that would assist them longer through their retirement years.
Percentage: the loan to value percentage is ultimately determined by the equity release company own actuarial statistics & lending criteria. Nevertheless, the homeowner can decide if they wish to take the maximum allowable amount in a drawdown mortgage or only a percentage of the amount offered. Additionally options such as the inheritance guarantee can set aside a portion of the home value that cannot be lumped into the lifetime mortgage. Furthermore, all lifetime mortgages have a no negative equity clause to prevent homeowners from taking too much in equity while a fixed annual percentage rate accrues onto the loan amount.
Features of Drawdown Equity Releases
• Provides a flexible cash facility to draw money in as smaller amounts of £1,000 a time whenever required in the future
• Drawdown can be tailored to take a lower initial capital amount to suit initial spending plans
• People drawing means tested benefits can control the release of funds to ensure no loss of benefits
• Interest only accrues on the actual amount withdrawn, not on the cash in the reserve facility
• Homeowners can add an inheritance guarantee to their product on some plans
• No further valuation costs and usually no admin fees are involved when taking additional drawdowns
• Homeowners retain 100% ownership of the property & have the assurance of a no negative equity guarantee
• Drawdown equity release is calculated based on the youngest homeowner’s age.
• The youngest homeowner has to be 55 or older.
• Minimum home value required is £60,000, but for most providers this is over £70,000.
• Homeowners typically need to withdraw £10,000 as the initial lump sum payment.
In essence, drawdown lifetime mortgages were designed to provide flexibility, where interest compounds only on the principle amount withdrawn keeping the total loan repayment lower than equivalent lump sum and other lifetime mortgage products.