Drawdown Lifetime Mortgages

A lifetime mortgage is a type of equity release arrangement that allows you to use the equity in your home to borrow money in later life. They are fairly flexible products that can be tailored to a wide range of needs.

Drawdown lifetime mortgages are a popular equity release option,  and in this article, we’ll look at how they work, what the benefits are, and how to get one.

What is a drawdown lifetime mortgage?

When you take out a lifetime mortgage, you can choose to take the entire loan as a lump sum or take an initial smaller lump sum and set aside the remaining loan as a reserve. The latter is known as a drawdown lifetime mortgage. This reserve of money (or drawdown facility) can then be used as and when it’s needed throughout the rest of your life.

How it works

First of all, your equity release provider calculates the overall amount you can borrow. You then split that figure into your chosen initial lump sum, and leave the remaining pre-approved loan amount with the lender until needed, at which point, you arrange a drawdown.

Most providers require the initial lump sum to be a minimum of £10,000 and allow you to retain the rest of your loan as a reserve, however, some lenders may cap the retained amount at between 50-150% of the initial lump sum.

Each drawdown needs to be a minimum of £2,000 at a time, and there may be a maximum number of times you can access funds each year. Arranging this is usually as simple as making a request to your lender, who will send you an offer with terms specific to that individual drawdown of funds. Each drawdown can incur a different rate of interest, however, this will be confirmed in the offer.

Interest Charges

One of the major benefits of taking your loan incrementally is that you’ll only pay interest on the amount that you’ve drawn down to date. The remainder in reserve will not incur any interest until you access it. This can save you a considerable amount of money compared with taking the loan as a lump sum, which incurs interest on the full loan amount from day one.

Example: How much you can save taking drawdowns vs a lump sum

On assessment, your provider allows you to borrow a maximum of £50,000 and offers you a typical interest rate of 4%.

Scenario 1:

You take the full £50,000 as a lump sum payment, and live for a further 10 years.

The total amount to repay from the sale of your home is £70,000 (£50,000 capital + £20,000 in interest).

Scenario 2:

You take £20,000 to cover the next five years, and the remaining £30,000 in five years’ time, passing away 10 years after taking out the plan, as per scenario 1.

The total amount to repay is £64,000 (£50,000 in capital + £14,000 in interest)

In both scenarios you’re borrowing a total of £50,000 over a 10 year period, but the drawdown option saves £6,000, which could go to your beneficiaries.

**Please note, this is for demonstration purposes only, and you should seek advice from an equity release expert to adapt this calculation to your individual circumstances.**

Repayment

There is no requirement to repay a lifetime mortgage, as the full loan and related interest are usually repaid from the sale of your home once you’ve passed away, or moved into long-term care. You can, however, choose an interest-only lifetime mortgage, which gives you the flexibility to repay your monthly interest.

Due to slower accumulation, repayment of interest can be much more affordable if you’ve chosen a drawdown lifetime mortgage, and people therefore often choose to repay some or all of the interest, if they intend to leave an inheritance.

How a broker can help

Drawdown lifetime mortgages can be a great way to top up your retirement income, however, they won’t be suitable for everyone. It’s therefore essential to speak to an expert broker with knowledge in this specialist area before you make a decision.

In fact, due to the strict regulations within this industry, many lifetime mortgage providers prefer to arrange plans via a qualified broker, rather than directly with applicants. As well as helping you to access all of the lenders within this market, the specialist brokers that we work with can also help you find the right provider for your circumstances.

Lenders and rates

At the time of writing (May 2023), typical interest rates on lifetime mortgages are between 5% and 6% and available providers include Legal & General, Pure Retirement and Scottish Widows. The best way to compare rates and equity release providers is to use a broker who specialises in later-life lending.

This will give you access to a much wider pool of deals to choose from and therefore boost your chances of securing the best one available.

Eligibility criteria

The same criteria tend to apply regardless of whether you choose a lump sum or drawdown payments, and whether you choose to repay interest or not, these include:

• Age – Borrowing is generally available to those aged 55+ (or 60+ with some lenders). Sometimes a maximum age limit of around 90-95 years applies, but not with all lenders.
• Property Value – You’ll need a UK home worth at least £70,000 for most lenders (£100,000 for others).
• Health – If you’re an older applicant, or have a reduced life expectancy due to ill health, you may be eligible for an enhanced lifetime mortgage. This can give you access to better rates and allow you to borrow more.
• Minimum borrowing – The total loan amount (initial lump sum + drawdowns) will usually need to amount to a minimum of £10,000
• Credit status – your credit status is not usually a consideration for lifetime mortgage providers, particularly if you are opting not to make any repayments. Most lenders will consider a drawdown lifetime mortgage even if you have credit issues.

Some lenders have additional geographical and property-based restrictions, for example, listed buildings are not often accepted as security, however, an experienced equity release broker will be able to help you navigate these requirements and find a lender whose criteria you match.

Things to consider

If you’re thinking of applying for a drawdown lifetime mortgage, here are some other factors to take into consideration before you press ahead…

Means-tested retirement benefits

One of the main benefits to a drawdown lifetime mortgage, is that it’s less likely to affect your eligibility to means-tested retirement benefits, such as a state pension. This form of borrowing allows you to tailor your bank balance so that you never surpass any maximum savings limit permitted to receive this type of benefit.

Early Repayment

You can choose to repay early if you change your mind, however, early repayment charges will often apply.

What about negative equity?

Lifetime mortgages that adhere to the strict code of conduct laid down by the Equity Release Council have a ‘no negative equity guarantee.’ This means that no matter how much interest accrues over the duration of your mortgage, you or your estate will never owe more than the value of your home.

If your home has reduced in value at the time of sale, however, this could still completely wipe out the inheritance intended for your loved ones.  To minimise this risk, some lenders allow you to ring-fence an element of the agreed equity for inheritance purposes.

Alternative options

There are alternatives to equity release, and a reputable broker will ensure you are able to make an informed decision that serves your best interest. Some options that may be more cost-effective for certain individuals include:

• Interest-only lifetime mortgage
• Retirement Interest Only Mortgage
• Home reversion plan

If you’re considering equity release to repay an existing interest-only mortgage, it may even be possible to extend the length of your existing mortgage or to remortgage.

Get matched with a lifetime mortgage expert

All of the lifetime mortgage advisors we work with are recognised by the Equity Release Council, and will only recommend lenders who work within their strict guidelines. They’ve been personally accredited by us and passed an LIBF course, so you can feel confident that they’ll help you select the equity release option, or alternative, that suits you best. If a drawdown lifetime mortgage is the right option, they’ll know which lenders offer the best deals to those in your individual circumstances.

Our free broker matching service will match you with the ideal equity release expert for you. Simply give us a call on 0808 189 0463 or contact us via this form to arrange a free no obligation chat.