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Drawdown Equity Release | What You Should Know
When looking at a lifetime mortgage for equity release on your home, one of the greatest concerns that people have is the interest that will be accrued during the life of the mortgage, and how that will affect the amount they leave for their descendants as part of their inheritance.
One option is the drawdown equity release or drawdown lifetime mortgage which provides additional flexibility that typically means less interest is paid.
Read on to find out more about drawdown equity release and how it can help you access to funds in your retirement.
And to speak to an adviser at any point to get advice on what's best for your situation, please get in touch.
What is Drawdown Equity Release?
A drawdown lifetime mortgage works by only releasing the funds to you as you need them, and you only pay interest on the amount drawn, thus significantly lowering the total interest paid over the lifetime of the mortgage.
This differs to a traditional lump-sum lifetime mortgage where the entire value of the loan is provided immediately and interest is accrued on this full amount from the outset.
Before we go on, let's take a step back and look at equity release more broadly to give some context.
What is Equity Release?
Equity release is an umbrella term for a range of financial products for homeowners that are designed to leverage the value you have in your home to provide you with funds in your retirement and later life.
In all cases, you are able to stay living in your home for the remainder of your life, making equity release a better option for many people than selling the home and downsizing.
The common features of equity release include:
- It is designed to leverage the equity you have in your home to release money to you now.
- Equity release is structured such that you don’t need to make any repayments and the debt is repaid in full upon your passing, or leaving the property to enter long-term residential care.
- You retain the full right to live in your property until you no longer need it.
- The amount of money you can obtain through equity release is linked to the level of equity you have in your property and the value of that property.
The Advantages of Drawdown Equity Release
One of the worries that happens when looking at a lifetime mortgage, is the amount of interest generated.
Interest is added to the principal of the mortgage each month and increases that principal, such that each month the interest generated is a little larger than previously.
As you pay interest on the full amount borrowed, even if you don’t spend that money, there can be a feeling that you are adding to the total of the mortgage debt unnecessarily.
An Example of Drawdown vs. Lump-Sum Lifetime Mortgages
The following example illustrates the difference in the interest paid between a drawdown lifetime mortgage and an equivalent lump-sum lifetime mortgage.
It is for illustration purposes only.
Sam is wanting to release £100,000 in equity from his property. He wants to pay off some existing credit card debt, do some home adaptions and renovations including changing his bathroom to a walk-in shower for easy accessibility, and go on an extended holiday with his son and two grandchildren.
Additionally, he wants to have some money available to him to ease his retirement. Sam is also aware in the back of his mind that his grandchildren may need financial support in a few years time when they start university.
Sam looks at the figures and decides he wants:
- £13,500 for existing debt
- £15,000 for home adaptions and renovation
- £10,000 for the holiday
- £20,000 to put aside for the grandchildren’s student life (£10,000 each)
- £40,000 to have access to if he needs it to make his retirement comfortable
He has rounded this up to £100,000.
Sam’s two options are a lump-sum lifetime mortgage at 6.8% (equal to 7.02% representative AER), or a drawdown lifetime mortgage at a slightly more expensive 6.85% (7.07% AER). Both rates are fixed for the lifetime of the mortgage, so Sam doesn’t have to worry about a change in rates later on.
With the lump-sum lifetime mortgage, Sam will be paying 6.8% interest on the full £100,000 from the outset; however, he actually only needs part of the money now.
He breaks this down as follows:
- Money needed today: £50,000 (debt, home adaptation, holiday, £10k of the £40k to have in the bank).
- Money needed in five years: £20,000 (£10k for the eldest grandchild, second £10k for his retirement).
- Money needed in nine years: £20,000 (£10k for the youngest grandchild, third £10k for the retirement).
- Money needed in twelve years: £10,000 (Final £10k for the retirement).
The following table shows the difference in interest payments between Sam’s two options. (Bold numbers indicate when additional money was drawn down).
Lump-Sum vs. Drawdown Lifetime Mortgage
|
Year |
Lump-Sum Balance |
Drawdown Balance |
Lump-Sum Interest Added (6.8%) |
Drawdown Interest Added (6.85%) |
|
1 |
£100,000 |
£50,000 |
£7,015.99 |
£3,534.60 |
|
2 |
£107,015.99 |
£53,534.60 |
£7,508.23 |
£3,787.47 |
|
3 |
£114,524.22 |
£57,319.08 |
£8,035.01 |
£4,052.00 |
|
4 |
£122,559.22 |
£61,371.08 |
£8,595.74 |
£4,338.45 |
|
5 |
£131,157.96 |
£85,709.53 |
£9,202.03 |
£6,058.98 |
|
6 |
£140,359.99 |
£91,768.51 |
£9,847.64 |
£6,487.31 |
|
7 |
£150,207.63 |
£98,255.82 |
£10,538.55 |
£6,945.91 |
|
8 |
£160,746.18 |
£105,201.73 |
£11,277.93 |
£7,436.93 |
|
9 |
£172,024.11 |
£132,638.65 |
£12,069.19 |
£9,376.50 |
|
10 |
£184,093.30 |
£142,015.15 |
£12,915.96 |
£10,039.34 |
|
11 |
£197,009.27 |
£152,054.49 |
£13,822.15 |
£10,749.05 |
|
12 |
£210,831.41 |
£172,803.54 |
£14,791.91 |
£12,215.84 |
|
13 |
£225,623.32 |
£185,019.38 |
£15,829.71 |
£13,079.40 |
|
14 |
£241,453.03 |
£198,098.78 |
£16,940.32 |
£14,004.01 |
|
15 |
£258,393.34 |
£212,102.79 |
£18,128.85 |
£14,993.98 |
|
TOTAL |
£276,522.19 |
£227,096.78 |
|
|
By managing his equity release lifetime mortgage as a drawdown rather than lump-sum arrangement, Sam saves almost £50,000 in interest over the first fifteen years of his equity release mortgage.
Recent Equity Release Case Studies
Drawdown Equity Release Pros and Cons
Drawdown equity release is a powerful way to leverage the money you have tied up in your home and is becoming a more popular way to manage retirement finances, however, it is important that you weigh up the positives and negatives before going ahead with a drawdown lifetime mortgage arrangement.
Con: The impact on your estate
The biggest effect of any equity release product is that it is repaid through the sale of your home in future years.
While drawdown equity release significantly mitigates this impact through to careful and sensible management of the amount drawn against the property, it is still a significant consideration and the single greatest negative to drawdown lifetime mortgages.
As the mortgage is potentially extremely long term, the interest accrued can be large and may become many times the value of the initial loan. This cost is eventually paid by your estate, meaning it lowers the amount of inheritance available to your heirs.
A Retirement Interest-Only mortgage, on the other hand, sidesteps this problem.
Pro: The balance with the rising price of housing
It is essential when evaluating the cost of a drawdown lifetime mortgage to consider the potential rise in value of your home.
There is every chance that the market value of your property rises in line with - or even exceeds - the interest portion of your lifetime mortgage.
This means that though the numbers for compound interest look high, they can be offset by the amount your property value increases in the same time.
The impact that they therefore have on your inheritance is typically no greater than it would when comparing the initial loan to the value of your property today - in other words, the interest can be balanced by the rise in your property value and the additional end impact on your estate could be potentially zero.
Pro: Access to money today
Without becoming too morbid, you cannot make use of the money in your home once you die. We all have a strong desire to help our children once we have passed, but often it is much more valuable to have access to the funds today.
Equity release means that you will not have to struggle through your retirement with money tied up in your home, and drawdown equity release enables you to access that value in a sensible and balanced way.
Pro: Flexibility
You do not have to set when you plan to draw the rest of the agreed money out of your house today; you can simply wait until the future and take the money as-and-when you need it.
The flexibility of a drawdown lifetime mortgage means you are not paying interest on any money just in case you need it later.
Pro: The saving on interest
We covered this in depth earlier, but it really cannot be understated how much the savings made on the interest make a drawdown lifetime mortgage a lot more palatable for many homeowners than a lump-sum lifetime mortgage.
Pro: The no negative equity guarantee
Like other lifetime mortgages, drawdown equity release is obtained with a no negative equity guarantee that ensures that even if the final value of the debt plus all accrued interest exceeds the value of your home, that there is no extra debt placed on the estate.
Con: Potentially higher interest rate
Because of the additional flexibility in the arrangement, some lenders will want to charge a slightly higher interest rate for a drawdown lifetime mortgage than with a lump-sum lifetime mortgage.
Getting Advice on Equity Release
Lifetime mortgages and all equity release products are overseen by the FCA in the UK, which monitors lenders to ensure that customers are protected and not sold inappropriate products that may put them into financial difficulty.
These extra checks are there to help you and though they occasionally mean a little more paperwork, the end result is a much safer mortgage lending environment that you can trust.
One part of the FCAs standards for equity release is that you obtain independent specialist equity release advice before signing up to any agreement.
Your adviser will:
- Discuss every aspect of the equity release landscape with you in easy to understand language, to ensure you are making an informed decision regarding which option you would like to consider.
- Assess that you are making the decision with the full understanding of the impact on your finances and any future inheritance, and that you are not under pressure from an outside third party or family member to do something that is not in your best interest.
- Work with you to obtain the best rates on the market, leveraging relationships and access to specialist lenders to find the finest deals.
- Help you throughout the application process and beyond, making sure you are always fully informed and happy with the process at every step.
To discuss drawdown equity release or any other mortgage product designed to help you in your retirement, contact us today.
