Drawdown lifetime mortgage
Are drawdown lifetime mortgages schemes right for you and your family? If you are looking for a way to access the equity in your property without putting the security of your retirement at risk, this may be the perfect option for you.
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When signing the lifetime commitment that a mortgage is, potential borrowers can be overwhelmed by the array of terminology. Providers do not always have the incentive to provide unbiased information and we are all aware of the difficulty in finding trustworthy financial information online.
So this article is a simple guide with tips for drawdown lifetime mortgages, that explores the value this option can provide for those nearing retirement that would like more financial freedom.
Done with a reputable provider who is a member of the Equity Release Council, it is a way of providing funds, whether to raise capital for property value improvement, investment or just to give the freedom to enjoy your final years. They are becoming increasingly popular, as protections have improved markedly over recent years.
Here is a short video that explains more about what they are.
What is drawdown equity release?
Equity release is a function whereby a homeowner is borrowing an amount money against the value that would normally be tied up in a property site.
The money is tax free cash and allows you to maintain ownership. Unlike a home loan, homeowners will not pay interest or be expected to make monthly repayments. An equity release scheme is usually done in the form of lifetime mortgages.
The procedure whereby an older homeowner nearing retirement borrow money against their property value. It is an ideal way to utilise the market value of an asset in the absence of a large cash facility.
While standard lifetime mortgages allow you to make withdrawals of money in a single lump sum amount the equity drawdown option is more flexible.
It allows homeowners to withdraw an initial cash lump sum, while having the flexibility to borrow more at a later date. You can then ‘draw down’ this equity when you please, under lifetime mortgage legal and general terms agreed with the borrower.
Because you retain home ownership, you do not have to downsize. You will pay interest depending on your rate, but the drawdown lifetime mortgage interest payments will only be made on the cash you have withdrawn, it will often be cheaper as there will be less compound interest building up over time, lowering your interest repayments.
What are lifetime mortgages legal and general requirements?
There are several general and legal lifetime mortgage standard requirements. In the United Kingdom, the borrower must be a UK resident, be at least 55 years of age. However, there are some specialist lifetime mortgages for pensions available. However, anyone applying must own their own property in England, Wales, Scotland or Northern Ireland.
How does drawdown equity release work?
The best drawdown equity release products are found when, in consultation with your adviser and lifetime mortgage providers, you agree a set cash facility in advance based on a range of personal factors.
The mortgage drawdown facility will take into account your income, age (older borrowers may typically withdraw more), your health and the overall value of the property in question. For this reason, you must provide an up to date property valuation.
After the initial lump sum amount is withdrawn, you will have the option to release smaller amounts of money at will and without additional administration costs depending on your financial needs at the time.
Depending on your interest rate, debts will accumulate, but only on the money that has been released to you.
This allows you to keep costs down and this is one of the major reasons for the popularity of the drawdown lifetime mortgage option.
What is an equity release calculator or drawdown mortgage calculator?
If you are considering a lifetime mortgage or another form of equity release, equity release calculators can be a first step. They are free and useful tools online that have the functionality of making an initial calculation of the potential amount of money and interest rate.
If you are eligible, you can get a quote or approximation of the amounts of cash against equity you can withdraw sent to your email address. The process usually only takes a few minutes, and provides results in seconds.
What is an enhanced lifetime mortgage?
Sometimes, personal circumstances such as illness can make mortgage and loan applications trickier. In the case of a drawdown lifetime mortgage however, it can increase the amounts of money you can withdraw as your life expectancy will be lower and the lender can expect to recoup their money faster.
The application involves filling out a health questionnaire that includes risk factors such as cigarette smoking, body weight and possible chronic or terminal illnesses.
This is one of the only ways having poor health can benefit a borrower financially, so it is worth taking advantage of. It could well require a full doctors report however, which can delay the progress of your application.
What are the differences between equity release and a lifetime mortgage?
This is the process of release money against your house, while a lifetime mortgage is the most popular way of doing this, accounting for a large percentage of equity release facilities.
Another option, for example, is a home reversion plan, where you effectively sell your property but retain the right to ‘security of tenure’ where you may maintain residence in the property until you die or move into care.
After this, if there are sufficient funds in your estate, the mortgage will be paid off directly. If, as should be the situation with a responsible equity release plan, you have a negative equity guarantee, you will never owe more than the amount your house is worth.
However, if the funding is not available, your estate executor has the entitlement to sell your house in order to repay your creditors. This means that your inheritance is a very important consideration if you wish to consider drawdown equity release.
What about repayments?
There are different variation of equity release mortgages, but if you receive an interest only mortgage, you will be required to pay interest based on your interest rate and also have the option to make repayments directly on your loan.
What are the advantage of a drawdown lifetime mortgage vs a lump sum lifetime mortgage?
There are many advantages to a drawdown lifetime mortgage.
The principal one is the flexibility to take money as and when you need it as opposed to taking the whole lump sum in one go. This means that you will pay less in compound interest as you only owe interest on the cash withdrawn, rather than the entire reserve amount.
For those receiving means-tested benefits, it is a useful option because some state benefits are restricted depending on things including your available bank account balance and income.
The use of a lifetime drawdown facility means you can structure the cash you receive in a way that allows you to take full advantage of the means-tested benefits to which you are entitled.
Generally, your adviser will use a drawdown lifetime mortgage calculator, also known as an equity release drawdown calculator, to demonstrate the savings of this approach. This will also help you to come up with a workable equity release money plan.
As there are usually no monthly payments to worry about, you need not be concerned with adding to your regular expenditure.
They are safeguarded by a ‘no negative equity guarantee’ which means that a borrower’s debt will never be higher than the value of the property against which it is secured. That alleviates the risk of falling into arrears or a house being repossessed.
In addition to your eligibility for means-tested benefits, you should also see in advance whether it affects your tax position or life insurance.
What can I do with the money?
In general, you are free to do whatever you please with the money. However, you are legally required to pay off any regular mortgage or other loans that are held against your property.
Many people use a drawdown lifetime mortgage for a wide range of different reasons. The money withdrawn can be used as a supplement to your income, retirement savings or pensions, for long term travel or for property renovations
What are the disadvantages of the drawdown lifetime mortgage?
Withdrawing money against your property can seriously affect the inheritance you wish to leave your heirs. If you wish your children to be the beneficiaries of your estate, you must work out whether a large equity release is appropriate for you.
Be aware also that if you die and are survived by a spouse, that spouse must also be a party to the mortgage. If they are not party to the agreement, they could be required to move out of the property.
The tradeoff for the flexibility mentioned above is that lifetime mortgage rates are often slightly higher than those for other types of mortgages or equity release schemes. However, calculators show that higher interest rates are usually balanced out by the fact that lower amount of money that is withdrawn in one go.
What other options do I have?
In the case of more serious problems with your finances, consider your eligibility for a mortgage holiday or alternative solution in place of this, such as remortgaging or downsizing. While many people do not like the idea of downsizing, there are cases where it is an option to consider.
What fees are involved?
While drawdown lifetime mortgage rates can offer good deals of financial freedom, you must consider expenditure on the relevant expert fees when you calculate your expenditure. These include fees paid to your advisers, possible application and survey fees, as well as the cost of legal advice.
These can be up to £3,000 when the process is done with experienced professionals.
What does a mortgage adviser do and how do I find a good one?
Choosing a good mortgage adviser, also known as a mortgage broker, can make or break your financial future. They have expert knowledge of the relevant markets and can advise you on the lenders and terms that suit your unique financial situation.
They have a duty to carefully consider your circumstances and give you detailed advice for why they are recommending the service that they are. They can help answer your questions and assess whether you fulfil legal and general lifetime mortgage requirements.
The activities of any mortgage advisers are authorised and regulated by the financial conduct authority and you can find the web site, email address and registered office listings by looking at the Financial Services Register.
What if I decide to move?
Mortgages from Equity Release Council certified lenders are considered ‘portable’. This means that the equity release plan can be transferred to a new property, as long as that property meets the criteria set out in the original agreement.
However, be aware that if you wish to withdraw from the plan entirely and pay back the drawdown lifetime mortgage schemes early, you may be liable for steep early repayment fees.
If you think this circumstance could apply to you, you could agree on a function with your lender when agreeing the terms and duration of your equity release plan.
A lifetime mortgage is a serious commitment, and the decisions made could be the difference between a retirement free of financial concerns and having money a continuing concern in your twilight years.
However, nothing can replace the advice of a qualified professional, who is authorised and regulated by the financial conduct authority, which should be the first port of all for anyone considering whether a drawdown lifetime mortgage is the right solution for them.
Start by visiting the registered office of an adviser or using an equity release calculator today!
Other articles related to lifetime mortgages you will find useful
What is a Lifetime Mortgage?
Lifetime mortgages are relatively new to the market – but their growing popularity means they’re already an industry staple. Increasingly people are looking to access cash with no strings attached in retirement.
Lifetime Mortgage Providers
If you are considering getting a lifetime mortgage, you will want to take a look at the leading lifetime mortgage companies. This article looks at who the main UK providers are and what they offer.
Drawdown Lifetime Mortgage
A drawdown mortgage allows homeowners to withdraw an initial cash lump sum, while having the flexibility to borrow more at a later date. You can then ‘draw down’ this equity when you please under terms agreed with the lender.
Lifetime Mortgage For Pensioners
Unlike with other mortgages, there is usually no maximum age for a lifetime mortgage product. The older you are, the more you can normally borrow.
Lifetime Mortgage Rates
The rate mortgage customers receive depends on the loan size and type. Normally, though, they begin at around 3% and go up to a maximum of around 7%.
What is a Home Reversion Plan?
A home reversion plan is a form of equity release scheme. Equity release schemes are a way of releasing some of the value of your property in exchange for cash.