What is a Lifetime Mortgage Drawdown? Overview & More
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If you have been considering a lifetime mortgage, you need to know about a drawdown lifetime mortgage. Drawdown lifetime mortgages could save you thousands of pounds in unnecessary interest, help you budget for retirement and may even ensure you can still receive means-tested benefits. Learn more here!
What is equity release and how does it work?
Senior homeowners can borrow against home equity by taking out an equity release plan. They will receive a tax-free cash lump sum and not have to make any monthly repayments. The debt will only be repaid after death using their property, or earlier if they move into residential care.
There are two ways to access equity release, namely through a lifetime mortgage or home reversion plan. Either should only be considered from a company that is authorised and regulated by the Financial Conduct Authority.
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Who qualifies for equity release in the UK?
To qualify to apply for equity release you must be at least 55 years old and sometimes below a certain age set by individual lenders. These minimum and maximum age requirements apply to all applicants.
The property that you wish to release equity from as a lump-sum loan must be the property where you habitually live rather than any rental investment or holiday home. It must be worth a minimum value set by the lender and it must not have any debts attached. This includes a residential mortgage.
The above is the criteria to apply for equity release but it does not ensure your application will be accepted. The lender needs to assess your property to make a final decision, which they do with the assistance of surveyors.
What is the difference between a lifetime mortgage and equity release?
The difference between equity release and a lifetime mortgage is that equity release refers to two different types of loans for seniors to borrow against their equity with no repayments. Whereas a lifetime mortgage is one of those loans. Therefore all lifetime mortgages are equity release but the same is not true the other way around. Some equity release loans can be home reversion plans.
Lifetime mortgages explained
A standard lifetime mortgage – also known as a lump sum lifetime mortgage – provides the loan to the senior homeowner and charges the homeowner interest on their loan. This is a fixed interest rate that remains the same for the entirety of the lump sum lifetime mortgage. The interest doesn’t have to be repaid each month, just like the capital loan amount.
Instead, the lifetime mortgage debt grows bigger each month as the interest gets added to the total owed. Both the capital and the accrued interest gets repaid in one payment when the homeowner moves into long-term care or passes away, using the sale of their property to fund the lump sum single repayment.
The different types of lifetime mortgages
There are variations on the lump sum lifetime mortgage. These variations work in the same way for the most part with some minor differences. There is an enhanced lifetime mortgage which usually allows people with poor health to access more of their home equity than normal, and there is a flexible lifetime mortgage that enables homeowners to make voluntary interest repayments so their debt doesn’t grow too big over time.
And then there is another type of lifetime mortgage called a drawdown lifetime mortgage – read on!
What is a drawdown lifetime mortgage?
A drawdown lifetime mortgage is another variation of a standard lifetime mortgage. As the name suggests, drawdown lifetime mortgages supply the homeowner with a drawdown facility rather than paying 100% of the loan out as a single lump sum.
How do drawdown lifetime mortgages work?
Drawdown lifetime mortgages allow the homeowner to take an initial smaller lump sum and keep the rest of their loan as a cash reserve. This money is kept with the lender until – and if – ever needed by the homeowner. If they decide they need additional funds, they simply have to ask the lender for some of the rest of their loan, which can take a few weeks to be put in their bank account.
Any money left in the cash reserve is not subject to interest because they haven’t actually accessed this part of their equity release loan.
Drawdown lifetime mortgage example
Janet and Barry want to take out a lifetime mortgage to renovate their home and make it more suitable for elderly living, such as getting a seated shower and stairlift among other home improvements. They are not exactly sure how much all of their renovations will cost, so they decide to take out a drawdown lifetime mortgage for £40,000.
They take out an initial loan amount based on their estimates, which is £25,000. As they get nearer the end of their renovations, they realise that they are a few thousand pounds short. This is not a problem because their equity release lender still has £15,000 left in a cash reserve. They ask their lender for an additional £5,000 to finish the project. They never need to take the remaining £10,000 in their cash reserve, so they never pay interest on this amount.
Drawdown lifetime mortgage interest rates
A drawdown lifetime mortgage charges interest in a different way to a standard lifetime mortgage due to how the loan is paid out. The initial smaller loan amount is charged with a fixed interest rate that rolls up like any other lifetime mortgage. If the homeowner decides to take out some of the rest of their loan, then this additional loan amount could be charged at a different interest rate based on the current rates in the market.
Thus, with drawdown lifetime mortgages, you may have a single loan but this loan amount could be separated into different parts with different interest rates. There is always a chance that the same interest rate is applied.
Why would you choose a drawdown lifetime mortgage?
There are many reasons why you may decide to use a drawdown lifetime mortgage over a lump sum lifetime mortgage. One of the main reasons is that they overcome one of the potential pitfalls of using a lifetime mortgage which is overborrowing unnecessarily, as stated by TV money expert Martin Lewis.
Many lifetime mortgage borrowers would take out more than they required and have some of the money sitting in a bank account. This money usually earns less interest than the amount of interest benign charged on it, and therefore it was costing them money to have it in their bank account.
By using a drawdown lifetime mortgage, you have the security of knowing that the money is available if needed without paying interest on it and making the debt grow bigger unnecessarily.
Two other reasons why you may prefer a drawdown lifetime mortgage are:
- To help budget for large-scale projects, as illustrated in our drawdown lifetime mortgage example above.
- To maintain your wealth below a certain value and prevent you from becoming ineligible for some means-tested benefits.
Does equity release affect your pension?
Equity release does not affect the basic state pension. It can only affect means-tested benefits that assess your wealth to decide how much you get. This includes Universal Credit and Pension Credits, however.
Can I pay off a lifetime mortgage?
It is usually possible to pay off your equity release loan, but doing so will activate early repayment charges that equate to a percentage of the loan left to repay. This means paying off equity release early can be exceptionally expensive in many cases.
What is the Equity Release Council?
The Equity Release Council is a group inviting lenders to become members and abide by the group’s rules. Many of these rules are designed to protect homeowners and provide additional guarantees. The reason lenders choose to join is because it makes their equity release products more appealing to the public.
One of the most reassuring rules is the negative equity guarantee. The negative equity guarantee states that a lender is not allowed to chase a debt that has not been repaid through the sale proceeds of the property. So if the property does not sell for an amount to repay all of the lifetime mortgage, whatever has gone unpaid will remain unpaid.
You can spot a member because they should have the Equity Release Council logo on their website. All members must be authorised and regulated by the Financial Conduct Authority.
Recap – what is a drawdown lifetime mortgage?
A lifetime mortgage is a lump-sum loan offered to senior homeowners to access home equity and not have to make any repayment until they die or move into care. The loan is charged with rolled-up interest causing the total owed to keep growing over time. When the loan needs to be repaid in full, the debtor’s home will be sold to repay in a single payment.
A drawdown lifetime mortgage is the same but does not require the homeowner to take the loan in one payment. They take an initial lump sum and then have the option of taking the rest of their loan if needed, saving them on interest compared to taking the whole loan and letting it sit in a bank account.
Free guides all about lifetime mortgages are here!
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