Drawdown equity release

Many retirees consider themselves asset rich but cash poor – their home (typically their main asset) is worth a lot, but their day-to-day retirement income may not leave them feeling flush. This has led many to consider equity release, which allows over-55s to access some of the value tied up in their home without having to sell up or downsize.

What is a drawdown lifetime mortgage?

Equity release lets you unlock a portion of the value in your home while you’re still living in it. A drawdown equity release, or a drawdown lifetime mortgage as it’s also known, offers you the flexibility to release the value of your home in stages, rather than as a single lump sum.

You’ll receive an initial smaller lump sum, together with an approved cash facility which you can choose to draw on whenever you like. The theory behind this is that you will only be charged interest on the money you release, so it may be more cost-effective for those who want to supplement their retirement income over the long-term.

Drawdown equity release schemes are generally considered one of the most popular forms of lifetime mortgage. However, it is important to speak with a qualified lifetime mortgages adviser before committing to ensure that this is the right plan for you.

What can a drawdown lifetime mortgage be used for?

You can use a drawdown lifetime mortgage to cover the cost of any purchase, expense or any other worthwhile purpose, such as a holiday or home renovations. A drawdown lifetime mortgage also offers the benefit of ongoing access to funds, which means it can be used to cover an anticipated future expense without incurring additional interest. In this sense, it functions much like a personal line of credit.

How does drawdown equity release work?

A lifetime mortgage involves releasing part of the value of your home, and this is transferred to you tax-free by your equity release provider, and you can then spend the money as you wish. The drawdown element of a lifetime mortgage comes in when you choose to receive this money in phases rather than as a lump sum.

You usually don’t have to make any repayments on these cash advances while you are alive or living in your home (unless you opt for a specific plan that involves making some flexible repayments along the way).

The money you’ve released from the value of your home is paid back once you die or move into permanent long-time care. This is usually achieved through the sale of your property. While you’re alive and living in your home, interest accrues on the amounts you have borrowed, so the final amount owed will be the amount of equity you have released plus the interest.

The drawdown equity release process

1. You agree on the size of your equity release loan with your lender, based on things like your age, health, personal situation and the value of your property.
2. You receive an initial sum upfront, and the rest is kept in reserve for you to “draw down” on. Interest begins accruing on the initial amount.
3. You release additional parts of the equity as and when you need them, and interest begins accruing on these amounts.
4. The loan stays in place until you sell the house, at which point you’ll need to repay the full loan amount and any interest that has accrued.

Drawdown lifetime mortgages vs lump-sum lifetime mortgages

There are various types of lifetime mortgage, but the two main plans are drawdown lifetime mortgages and lump-sum lifetime mortgages. As explained above, a drawdown lifetime mortgage is when you release equity in your home in stages, and a lump-sum lifetime mortgage is when you release the equity all in one go.

Both of these lifetime mortgages mean you stay living in your home, and both involve the repayment of the equity – plus interest – when your home is sold after you die or go into permanent long-term care.

The main difference between the two is the way in which you access your funds – some people prefer a lump sum, so they can spend it on helping their children get on the property ladder or go on the holiday of a lifetime, for example.

Other equity release customers prefer to receive the money in stages, to help supplement their retirement income and everyday spending.

The way interest is accrued is therefore also different. With lump sum equity release you’ll start racking up interest on the entire loan amount, from the first day you receive your lump sum, typically at a fixed interest rate for the duration of the term.

With drawdown equity release, interest is only accrued on the money you “draw down” on and no interest is accumulated on the money which remains untouched in your cash facility. This means interest will be accumulating at a slower pace overall, so it will probably work out to be more cost-effective than a lump-sum mortgage for the same total amount.

Drawdown vs lump sum cost comparison

To illustrate how much the cost can differ between a drawdown and lump sum lifetime mortgage, consider the following comparison of two £50,000 lifetime mortgages:

A homeowner who takes out a lump sum lifetime mortgage for £50,000 with an AER of 6% would pay £39,542 in interest at the end of the loan term. By comparison, the same homeowner may only pay £28,566 if they took out a £50,000 drawdown lifetime mortgage, with £20,000 upfront, and an additional £10,000 released after two, four and six years. This means they would pay around £10,975 less on a drawdown mortgage.

How much does a drawdown lifetime mortgage cost?

This will vary depending on what size portion of your property’s value you choose to release, and which equity release provider you decide to go with. They will offer you an equity release plan and an interest rate depending on your age and the value of your home. Interest rates for lifetime mortgages are usually higher than those for traditional residential mortgages.

It’s worth pointing out that if you own your home jointly with another person, the provider will take into account the youngest of your two ages. You’ll also pay back the equity loan when the last person dies or moves into permanent long-term care. This could potentially be a couple of decades on from your first stage of equity release, so the amount you owe in borrowings and interest could start to add up to a substantial total.

So, when choosing an equity release provider, you should look for one that is a member of the Equity Release Council. Lifetime mortgage products from these providers have a “no negative equity guarantee”, so you never end up owing more than your home is worth by the time it comes to pay it off.

You may also need to pay a number of fees as part of the loan application process, such as a surveyor fee, legal fees and application fee.

Pros and cons of a drawdown lifetime mortgage

Is drawdown equity release right for me?

If you own your home and want to unlock some of the equity in the property, you may want to consider a drawdown lifetime mortgage. Compared to a lump sum lifetime mortgage, a drawdown equity release loan will also best suit homeowners that:

• Do not need access to the full equity amount upfront
• Want ongoing access to funds as and when they need them
• Want to reduce the amount of interest they pay on their lifetime mortgage

Before you apply, it’s best to speak to a specialist broker or adviser who can explain your equity release options in more detail, and help you work out if a drawdown lifetime mortgage is right for you.

Eligibility criteria

To qualify for a drawdown lifetime mortgage, you’ll need to meet the following requirements:

• Be at least 55 years old
• Own a house worth at least £70,000
• Be a UK resident

Certain lenders may also have other criteria, beyond the general requirements listed above, that you will need to meet to be eligible for a lifetime mortgage.

How to apply for a drawdown equity release

Before applying for a drawdown lifetime mortgage, you’ll first want to speak to a financial adviser or broker who can explain the type of equity release loan that may best suit your circumstances.

Once you’ve discussed your options, you can then apply for a lifetime mortgage quote and begin the formal application process.

Alternative options to a drawdown lifetime mortgage

If you are looking to release equity in your home, or access some extra money in your retirement, there are other options available. We have listed some of these below with a link to our guides, as it’s important that you consider carefully which route is right for you.

• Lump-sum lifetime mortgage (equity release)
• Interest-only lifetime mortgage (equity release)
• Home reversion plan (equity release)
• Retirement interest-only mortgage
• Remortgaging
• Downsizing or letting out a spare room
• Personal loan

It’s also worth getting some independent financial advice before making a significant borrowing or estate planning decision. This is particularly important with equity release plans, as they may also affect any means-tested state benefits you receive.

Frequently asked questions

• Can I use a lifetime mortgage to buy a house?

  Yes, it’s possible to use a lifetime mortgage to purchase another property, but this will depend on your lender, as well as the value of the property you want to buy and that of your existing home.

• Can you get out of a lifetime mortgage?

  In general, lifetime mortgages end once your home has been sold, but depending on your lender, you may be able to repay your loan early. However, you will generally be charged an early repayment fee for doing so.

• Do I need to pay for the valuation of my home?

  Yes, when you apply for a lifetime mortgage or equity release loan, you will generally need to cover the cost of the surveyor or valuation that is taken out to determine the value of your house.