What is Drawdown Equity Release? Overview, FAQs & Tips

Do you want to know more about drawdown equity release? We're here to help. We understand it can be a bit tricky to know what's what, so we're here to make it easy for you.

In this article, we’ll talk about:

• What equity release is and how it works.
• Who can use equity release and how to get a realistic quote.
• The benefits of equity release, especially drawdown equity release.
• The interest rates for drawdown equity release.
• How drawdown equity release might affect your benefits or taxes.

We know that your home’s equity is precious to you. It’s important to make sure you understand everything before you make a big choice. We’ve got lots of advice to guide you from the start to the finish.

Let’s dive in.

How does it work?

Equity release works through a lifetime mortgage or home reversion scheme. 

Lump-sum lifetime mortgage

A lifetime mortgage is a loan secured on your home; you retain ownership. Interest that is not paid is added to the balance. The loan is usually settled when the last borrower dies or moves permanently into care, subject to the contract. Required or optional repayments vary by product.

Illustration only: £65,000 at 6.4% interest compounded annually without repayments would become about £137,000 after 12 years, excluding fees. A no-negative-equity guarantee is subject to its terms and does not prevent the balance from growing.

Some providers use health and lifestyle information when assessing terms. Any questions, medical evidence or examination requirements depend on that provider’s underwriting.

Lump-sum home reversion scheme

A home reversion plan is a sale of part or all of your home, usually below open-market value, in return for money and the right to remain under the plan’s occupancy terms. It is not a loan. The provider receives its agreed share when the home is sold.

Thus, both methods can be expensive and eat into the value of the homeowner’s estate. 

» TAKE ACTION NOW: Find out how much equity you could release

Who can use it?

Eligibility depends on the product, age, property, credit circumstances and any required affordability assessment. Minimum property values and borrowing limits are lender-specific. An existing mortgage normally has to be cleared at completion, often using some of the released funds. See related guidance.

Most standard lifetime mortgages start at age 55, but some payment-term lifetime mortgages are available from 50 and require interest payments for an agreed period. Home-reversion minimum ages and all other eligibility rules depend on the provider. Check the youngest applicant’s age and the actual product criteria.

What does a drawdown mean?

Drawdown equity release is when the homeowner does not receive their home equity as a lump sum loan. Instead, they receive a facility that allows them to take their total amount in instalments over time.

How does it work?

A drawdown plan may let you take later amounts from an agreed facility, subject to minimum withdrawals, limits and the lender’s terms. It is not necessarily unrestricted access on any schedule.

Always check the terms and conditions of your drawdown equity release plan to see if there are any restrictions on how you use the drawdown facility. 

Lifetime mortgages

Drawdown lifetime mortgages work in the same way as any other lifetime mortgages, but as the name suggests, you get the money through a drawdown facility instead of a lump sum. The loan you receive is still tax-free cash. 

Interest is generally charged only on amounts drawn. Each later drawdown may be offered at the rate then available, so different portions of borrowing can have different fixed rates.

As opposed to having a lump sum sit in your bank and not get used for a while, you can avoid paying as much interest on it by only drawing down on what you plan to spend in the immediate future. 

Home reversion schemes

Home reversion has a different cost structure because it involves selling a share of the home. Compare the actual purchase price, retained share and terms rather than assuming drawdown has no financial effect.

However, it can still help budget for large home renovation projects. And there is an additional benefit of choosing drawdown equity release over lump sum equity release to do with means-tested benefits. We’ll return to this later. 

Interest rates

Drawdown lifetime mortgages are not inherently variable-rate products. A later withdrawal may carry a different fixed rate from the initial advance; check each offer and the facility conditions.

Rates change and depend on the product and your circumstances. Obtain a current personalised illustration and compare the APRC, fees, repayment options and total projected cost; this article does not quote a live market-leading rate.

How common is it?

Product availability and drawdown terms vary. Ask a qualified adviser to compare suitable current options.

Does it affect benefit payments?

Taking out a lump sum lifetime mortgage or drawdown lifetime mortgage will not affect your entitlement to a state pension, but it can affect your entitlement to means-tested benefits. 

If the equity release loan pushes your savings above a certain threshold, you can lose your right to (full) pension credit payments. And when you no longer receive pension credits, you can lose your entitlement to council tax reductions and other means-tested benefits. 

Taking smaller amounts can affect the capital you hold, but does not guarantee benefits eligibility. Ask a benefits adviser about capital limits, disregards and deprivation-of-capital rules before arranging withdrawals.

Do you pay tax on these plans?

A lifetime-mortgage advance is borrowed capital rather than taxable income. Home reversion is a property sale, and later income or gains from released money can have separate tax consequences.

It might feel like you are selling your home back to a lender due to not having to make any monthly payments. But the cash facility really is a loan and should be viewed as such. Loans are not subject to tax. 

Can I move house afterward?

Yes, it is possible to move house after taking out a drawdown lifetime mortgage on your current home. The Equity Release Council states that any of their members should allow homeowners to move home to suitable alternative properties and take their current mortgage with them. 

But what does ‘suitable’ mean in this instance?

A new property must meet the provider’s criteria. Moving to a cheaper home may be possible, but a partial repayment or charges can apply.

If you downsize, the lender may require part of the loan to be repaid. Any protection or exemption from early-repayment charges depends on the product and conditions.

Is it a bad idea?

The decision to use any equity release method should be a personal one based on your specific finances and circumstances. You should always ask for a personalised assessment from a financial adviser. It is never always a good or bad idea – and the same applies to drawdown equity release. 

Drawdown can offer flexibility and reduce interest compared with taking the same total amount upfront, but future rates, withdrawal terms and benefits consequences need individual assessment.

Yet, it may not be an option for people who want to use all of their equity for a single purchase, such as larger-scale home improvements. 

Learn more at MoneyNerd for free! 

We have many other free lifetime mortgages guides and discussions at MoneyNerd. Our team has been busy creating over 100 new posts dedicated entirely to equity release, discussing these products from all angles. 

Things to consider

Equity release includes lifetime mortgages and home reversion plans. A lifetime mortgage is a loan secured on your home; a home reversion plan sells part or all of the property. Equity release reduces what may be left in your estate and can affect means-tested benefits and future care funding. A lifetime mortgage is usually repaid when the last borrower dies or moves permanently into care, subject to the plan terms. Specialist financial and independent legal advice are needed. Any existing mortgage must normally be repaid from the proceeds or other funds. Age Partnership publishes an advice fee of £1,995 payable on completion; confirm the current fee in your personalised illustration. Lender and legal fees may also apply.