Equity Release Scheme
A drawdown lifetime mortgage scheme is one of the variations of the standard lifetime mortgage that is available in the equity release marketplace. This particular variation is a suitable option for those homeowners who only want to release equity as they need it and who are interested in keeping their interest costs to a minimum. In this sense, homeowners have a level of control over the equity being released from their property. If you are interested in a lifetime mortgage scheme that affords you a level of control and flexibility in how much you borrow and at what time, a drawdown lifetime mortgage scheme may be the best option for you.
How a Drawdown Lifetime Mortgage Works
A drawdown lifetime mortgage functions similarly to a standard lifetime mortgage except that it also comes with a drawdown facility. This particular product was created out of the old lifetime mortgage products but allows for some level of flexibility in that homeowners do not have to be as accurate in predicting how much cash they will need during retirement. In years past, homeowners would have to predict precisely how much money they would need and then they would ultimately use what they needed straight away while putting the remaining balance in a savings account. This was not always the best option given that the interest accruing on that borrowed money far exceeded any interest the homeowner was making off of the savings account.
With the drawdown version of the lifetime mortgage, homeowners are now able to release some equity right away while preserving the surplus in a cash reserve facility that can be withdrawn from as needed. The money that is saved in the cash reserve facility does not accrue interest until it is withdrawn.
To make a withdrawal from the cash facility, the homeowner makes a simple request to the lender. Generally speaking, most lenders require a withdrawal amount of at least £2,000 per withdrawal. It typically takes just a couple of weeks for the homeowner to receive the funds. There are no admin or application fees incurred when applying for and receiving a cash payment from the cash reserve facility.
To be eligible for a drawdown lifetime mortgage, the youngest homeowner must be at least age 55. The amount available to each homeowner is decided upon by the lender who will use a calculation that includes the youngest homeowner’s age and the property valuation. Once the amount available is known, the homeowner can decide how much to withdraw upfront. The remaining balance is held by the lender in the reserve facility to be drawn from in the future, if needed.
Advantages and Disadvantages
As is the case with every product, there are both advantages and disadvantages to a drawdown lifetime mortgage scheme.
Advantages include the level of flexibility offered by this product, particularly as it relates to being able to control the amount being borrowed at all times. In addition, the homeowner maintains 100% ownership of the property and can therefore capitalize on any increases in property values once the home is finally sold. Lastly, it is easy to access additional funds when needed and the homeowner can borrow only what is needed to help control the overall loan balance.
Disadvantages include the fact that drawdown payments can have a higher interest rate than the original loan amount. This is because all withdrawals will incur the interest rate applicable at the time of withdrawal since there is no interest on the reserve facility funds until they have been withdrawn. In addition, some homeowners may find that they have restrictions on the size of the initial loan amount.