Guide: Drawdown Lifetime Mortgage
As you move closer to retirement, it becomes increasingly difficult to borrow money traditionally, as lenders recognise your income can be less regular. However, there are many different equity release
products available to allow customers to borrow funds even after retirement. For accessing any kind of lifetime mortgage
, you have to be at least 55 years old.
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One of the products available is the drawdown lifetime mortgage. It allows the borrower to take a smaller initial lump sum (or even no money upfront) and then agree on a drawdown facility that can be used in the future (similar to an overdraft). If you use the drawdown (i.e. take money out in the future) you pay interest on it, if you don’t take any money out, you don’t have to pay interest.
A drawdown lifetime mortgage is suitable for those looking to draw cash tied up in their homes to have an additional income source and spend it on other things, such as a home renovation project or going on a holiday. Cash withdrawal in a drawdown lifetime mortgage can be accessed in two steps:
Taking out an initial lump sum amount, and withdrawing the remaining cash as and when you like.
Drawdown lifetime mortgages come with a compounding interest component (i.e. it adds up and increases over time). The interest has to be repaid when you move into a permanent care facility or when you die and your home is sold.
Key features of drawdown lifetime mortgage
Here are some of the key features of a drawdown lifetime mortgage:
- The interest rate only applies to the cash you withdraw, and not to your reserves / agreed facility.
- The interest rate is typically higher compared to other types of lifetime mortgages.
- You don’t have to make any kind of monthly payments. The interest accrued is paid when you move out into a permanent care facility or die. In both cases, the interest is paid back when your home is sold.
- The option to withdraw cash provides a flexible means to adjust a lifetime mortgage with your retirement plan.
- You can adjust the drawdown lifetime mortgage along with your income-based benefits, also known as means-tested benefits.
- Cash accessed from drawdown lifetime mortgages can be used in a variety of ways. For example a holiday, home renovation or however you choose
- You will keep ownership of your home
- Some lenders may allow you to move home and port the mortgage across if you wish to downsize
Eligibility criteria for drawdown lifetime mortgage
The eligibility criteria for most types of lifetime mortgages are largely similar, with few variations. The eligibility requirements for drawdown lifetime mortgage are as follows:
- Health: Generally, the lower your life expectancy based on your medical records, the higher your chances to qualify for a drawdown lifetime mortgage.
- The eligibility criteria state that you must be at least 55 years old.
- A standard residential property should be worth at least £70,000.
- Lenders also look at the type of property you live in. Usually, their preference is a standard construction property.
- Your property must be in the UK but it is not necessary for you to be a British citizen. The lender will look at your credit score before making his or her final decision.
Advantages of drawdown lifetime mortgage
- You have a level of flexibility to withdraw money whenever you like.
- The interest rate is only applied to cash withdrawn giving you much greater control
- While you withdraw additional funds from the drawdown lifetime mortgage, you can retain your homeownership.
- It doesn’t require any kind of monthly repayment plan.
Disadvantages of drawdown lifetime mortgage
- If you decide to pay back the loan earlier than the agreed date, you may face high ERC charges.
- Each withdrawal is subject to a different interest rate.
- Some lenders may set a limit to how much cash you can withdraw each year.
To conclude, a drawdown lifetime mortgage offers more flexibility if you are seeking a flexible cash withdrawing option compared to a lump sum mortgage facility. For further information, consult a financial advisor
to calculate your suitability for a drawdown lifetime mortgage.