Are you considering equity release? If so, you could be forgiven for thinking that all plans are identical. The reality is, however, that there are many different options to choose from, and no two plans are the same.
From lump sum lifetime mortgages where your money is released in one go (with typically no monthly interest repayments to make) to interest-only plans (where the accruing interest is repaid monthly) to voluntary repayment plans (where you can make ad-hoc interest payments when you have extra money to do so), there are options to suit different needs and circumstances. Yet, with so many choices available, there is one form of equity release which continues to rise in popularity: drawdown lifetime mortgages.
It’s easy to see why. Drawdown lifetime mortgages work by the lender offering you a ‘cash facility’. Once you have borrowed an initial amount, you can then dip back into your facility as and when you want to. As interest is only charged on the amount borrowed, drawdown lifetime mortgages can be an effective way of managing the final amount of interest to be repaid. But that’s not all…
Read on to learn more about why a drawdown lifetime mortgage could be the ideal way to access the money locked up in the value of your home – and start to enjoy financial freedom.
A great option if you want to borrow in smaller amounts
Drawdown lifetime mortgages are the most popular type of plan that customers choose and, according to recent figures from the Equity Release Council (the industry’s trade body), 64% of all plans taken out in the second half of 2018 were drawdown.
There are two main reasons for this:
Firstly, because of the way drawdown plans work. Your lender will calculate how much you can borrow in total, based upon the age of the youngest homeowner (which must be over 55), the value of your home and if the homeowner(s) has any qualifying health conditions. This amount is called your ‘cash facility’.
When your plan is approved, you have to withdraw a minimum amount from your facility - £10,000 – and the remainder is there for you to borrow from as and when you want to in the future.
So, if your cash facility is £100,000 and you’ve borrowed £10,000 initially – you have £90,000 to dip into as and when you want.
Your lender won’t charge you for this, but you do need to bear in mind that the interest rate charged for additional withdrawals will be at the rate that is applicable at the time – which could be higher or lower than when you first borrowed from your facility.
The other good news is that when additional money is needed from the cash reserve facility, it’s usually a simple request direct to the lender and the funds are usually paid into your bank account within 2 weeks.
As you are only charged interest on the amount you borrow, making withdrawals from a drawdown lifetime mortgage over time is a great way to minimise the final amount of interest to be repaid – which is made (along with the total amount lent) when the last borrower dies or moves into long term care.
Drawdown lifetime mortgages can also have a positive effect on the inheritance you leave behind, because if you borrow a smaller sum, less interest (as well as the total amount borrowed) has to be repaid – leaving more money for your loved ones.
The flexible features of drawdown lifetime mortgages
The interest rates on drawdown lifetime mortgages are very competitive at the moment and they come with a range of flexible features, which you may not be aware of. These include:
A guaranteed inheritance. The lender will ‘ring fence’ a percentage of the value of your house, so that no matter what happens in the future, you have the peace of mind of knowing that your loved ones have a guaranteed inheritance.
Downsizing early repayment charge protection. You may want to sell your home in the future and repay your drawdown lifetime mortgage. Many lenders now allow you to do this without the penalty of an early repayment charge. Typically the plan has to have been in place for at least 5 years before you take advantage of this feature.
Tapered early repayment charges. If you do decide to sell your home and repay your lifetime mortgage, then many plans now have early repayment charges that are reduced over time – making this a realistic option.
Voluntary repayment options. Another benefit of many drawdown lifetime mortgages is the ability to make additional repayments as and when you have the extra money. Many allow you to repay 10% of the original amount borrowed each year – which could also help to reduce the final amount to be repaid.
Many plans are also offered with free valuations or other incentives. Like all the lifetime mortgages we advise on, you will always continue to own your home and you have the added peace of mind of a ‘no negative equity’ guarantee. No matter what happens to house prices in the future, your loved ones will never be out of pocket when your plan is finally repaid.
Of course, while drawdown lifetime mortgages are popular, no two retirements are the same. That’s why we advise speaking to an independent financial adviser, such as one of the impartial advisers at Equity Release Supermarket. It costs you nothing to speak with one of our expert advisers and our very competitive advice fee is guaranteed to never be more than £995 – which you only pay when your plan completes.
To hear more about what drawdown lifetime mortgages could offer you, get in touch with the Equity Release Supermarket team on Freephone 0800 802 1051, or by email at [email protected].