A drawdown lifetime mortgage is a type of equity release plan that allows you to unlock the value of your home gradually rather than taking a large lump sum upfront.

This flexible approach to equity release can be a practical solution for homeowners aged 55 and over who want to access their property’s value without making one large withdrawal.

This guide will explain how drawdown lifetime mortgages work, what their benefits and drawbacks are, and whether they might be right for you.

What Is a Drawdown Lifetime Mortgage?

A drawdown lifetime mortgage is a financial product that allows you to borrow money against the value of your home.

Unlike a lump sum lifetime mortgage, where you receive a single lump sum, a drawdown lifetime mortgage gives you the flexibility to withdraw smaller amounts of money as and when you need it.

Here’s how it works:

• Initial Lump Sum: When you take out a drawdown lifetime mortgage, you can choose to receive a small initial lump sum. This amount is agreed upon when you set up the mortgage.
• Cash Reserve: The remaining funds are held in a cash reserve by the lender.
• Flexible Withdrawals: You can draw down additional funds from this reserve as needed, without incurring interest on the unused portion.
• Interest Accumulation: Interest is added to the loan balance over time. Since you only draw down what you need, the interest you pay can be lower compared to taking out a large lump sum upfront.
• Interest Rates: Every new drawdown will be subject to the current interest rate available to you at the time.
• Repayment: The loan, plus any accumulated interest, is usually repaid when your home is sold. This typically happens when you pass away or move into long-term care.

Benefits of a Drawdown Lifetime Mortgage

The benefits of a drawdown lifetime mortgage include its flexibility when it comes to accessing funds and the resulting interest savings.

Other advantages include:

• Flexibility: Allows homeowners to access funds as needed, rather than taking a single lump sum.
• Interest Savings: Interest is only charged on the amount withdrawn, not the total reserve. This means the overall cost of borrowing can be lower than that of a lump sum lifetime mortgage. This can help preserve more of your home’s value for your heirs.
• Financial Control: Provides greater control over finances, enabling homeowners to manage their cash flow effectively.
• No Monthly Repayments: Typically, there are no monthly repayments; the loan and interest are repaid when the property is sold (unless you choose to make partial repayments).
• Inheritance Protection: Some drawdown lifetime mortgages offer the option to protect a portion of your home’s value as an inheritance for your loved ones. This means you can still leave something behind, even after the loan is repaid.
• Tax-Free Funds: The money you receive through a drawdown lifetime mortgage is untaxed, meaning you can use it for any purpose, whether that’s home improvements, paying off debts, or enjoying your retirement.

Of course, it's important to weigh these benefits against the potential drawbacks before making any decisions.

Drawbacks of a Drawdown Lifetime Mortgage

The drawbacks of a drawdown lifetime mortgage include the fact that the loan will eventually be repaid through the sale of your home.

Other potential downsides include:

• Facility Not Guaranteed: Your drawdown facility isn't guaranteed and can be withdrawn by the lender at any time.¹
• Reduced Inheritance: The loan and accrued interest, which will be repaid through the eventual sale of your home, reduce the value of your estate, potentially affecting the inheritance you are able to leave your heirs.
• Accumulating Interest: Unless you choose to make regular payments, interest will compound over time, increasing the total amount repayable.
• Fluctuating Interest Rates: Each new drawdown comes with the prevailing interest rate attached, which can be higher than the initial rate you were charged.
• Impact on Benefits: Accessing funds can affect eligibility for means-tested state benefits such as Pension Credit or Council Tax Support.
• Complexity: Drawdown lifetime mortgages can be complex financial products, requiring careful consideration and professional advice.
• Early Repayment Charges: If you decide to repay the loan early, your drawdown lifetime mortgage may come with early repayment charges. These can be substantial, so it’s important to understand the terms of your mortgage before proceeding.

When speaking to your equity release advisor, you'll be able to discuss these drawbacks to make sure a lifetime mortgage would suit your needs.

Is a Drawdown Lifetime Mortgage Right for You?

A drawdown lifetime mortgage may be right for you if you are aged 55 or over and wish to access the equity in your home without taking a single lump sum.

This option is ideal if you prefer to withdraw funds as needed, thereby only accruing interest on the amount you use.

It provides financial flexibility and control, allowing you to manage your cash flow effectively while retaining ownership of your property.

Additionally, if you want to avoid monthly repayments and are comfortable with the loan being repaid when the property is sold, a drawdown lifetime mortgage could be a suitable choice.

However, it’s not the right choice for everyone.

If preserving your home’s value for your heirs is a top priority, or if you’re concerned about the potential impact on your benefits, you may want to explore other options.

Before deciding on a drawdown lifetime mortgage, you will have to speak to a qualified equity release advisor.

An advisor can help you understand the full implications of this type of mortgage and whether it aligns with your financial goals.

Alternatives to a Drawdown Lifetime Mortgage

Alternatives to a drawdown lifetime mortgage should be considered before you make your final decision.

Drawdown lifetime mortgage alternatives include:

• Home Reversion: Sell all or part of your home to a reversion company in exchange for a lump sum or regular payments.
• Downsizing: Sell your current home and purchase a smaller, less expensive property to release equity.
• Retirement Interest-Only (RIO) Mortgages: Borrow against your property and make monthly interest payments, with the capital repaid when you pass away or move into long-term care.
• Unsecured Lending: Use personal loans or credit cards for short-term financial needs.
• Using Existing Assets: Liquidate investments, savings, or other assets to access funds without taking on additional debt.

Speak to a qualified advisor to discuss your options.

Common Questions

Conclusion

A drawdown lifetime mortgage offers a flexible and potentially more cost-effective way to access the value of your home during retirement.

By allowing you to withdraw funds as needed, this kind of lifetime mortgage can help you manage your finances more effectively and reduce the overall interest you pay.

However, it’s important to consider the potential impact on your inheritance and benefits and to seek professional advice before making a decision.

If used wisely, a drawdown lifetime mortgage can provide financial security and peace of mind in your later years.