Drawdown Mortgage

What is a drawdown mortgage?

A drawdown mortgage is a type of equity release product that allows you to release money now and enables a reserve facility to draw the mortgage down over time.

For instance, if you took a £150,000 drawdown mortgage but did not need all of the funds on mortgage completion, you could take an initial amount leaving the remainder in reserve.

This means you would only be paying interest on the amount drawn down. For example, if you have taken £50,000 with £100,000 in reserve, interest will be charged under £50,000.

You could then request from the lender further funds in the future, with interest becoming payable on these funds at the time.

Equity release mortgage products are available for homeowners over 55 years old.

The amount you can apply for will depend upon the property’s value and your age.

Equity release mortgage products are a specialist area, so professional advice is essential.

What are the different types of drawdown mortgages?

There are two forms of equity release products. These are lifetime mortgages and home reversion plans.

Lifetime mortgages

Lifetime Mortgages are for people over the age of 55 who wish to remain the owner of their home are. By default they roll up over time due to interest being compounded.

However, some products have the option to make monthly payments so the balance can remain at a level basis or even decrease if the mortgage is overpaid.

Home reversion plans

Home reversion plans are when a house is sold (or a percentage of it) to a home reversion company in exchange for a lump sum or an income.

The home reversion company allows you to remain on your property for your lifetime.

The impact of this transaction is that you will no longer own your home or the percentage of it that you sold to the company.

You would not expect to get the market rate for the equity you sell due to having the right to remain in the property for life.

You should take professional advice if you are thinking of doing this as it is not suitable for everybody.

What can I use the funds for with a drawdown mortgage?

What you use the funds for when taking a drawdown mortgage is up to you.

Although lenders will need to know your plans with the money, how you spend it is for you to decide.

For instance, when people take drawdown mortgages, common uses are for home improvements, adapting homes for disability, car purchases, going on holidays, helping families, holiday home purchases or simply raising money to improve their lifestyle. This may mean paying for hobbies or regular eating out.

Different lenders will have their own criteria on how the money is spent, so some may exclude specific uses (for example, paying tax bills).

It would help if you told your equity release mortgage advisor your complete plans regarding using the money so they can look for the correct lender for you.

Is a drawdown mortgage right for me?

A drawdown mortgage will not be suitable for everybody.

For instance, a drawdown mortgage may not be the logical solution if you only require a lump sum now and do not expect to need more money in the future.

Also, as equity release mortgages are expensive if interest is not paid, these are not the right solution for everybody if they wish to retain significant equity within the home.

There may be standard mortgage products available to you, or an option such as downsizing may make more sense based on your situation.

If you are thinking of taking a drawdown mortgage, consider things carefully and do your research.

Talk to a professional Adviser about your goals and concerns to see if there is a product that correctly lines up with your objectives.

Most equity release mortgage advisers will offer you a free consultation, so you know what your options are.

What kind of fees may be involved with a drawdown loan?

There will likely be fees to pay when you take a drawdown mortgage.

The fees payable will depend upon the lender and the equity release mortgage advisor.

Typical fees to pay when taking an equity release scheme mortgage are lender arrangement fees, valuation fees, lifetime mortgage advisor fees and legal fees.

Your equity release mortgage advisor can discuss which fees are payable during your consultation with them.

Are the funds on a drawdown mortgage tax-free?

The funds taken when you release money with an equity release mortgage are tax-free. This means there will not be a charge payable to HMRC on the funds released from your property.

However, if you release money from your property using a lifetime mortgage, having the extra funds in a savings account may mean that you do not qualify for certain benefits that you may have otherwise.

If you speak to an equity release mortgage advisor, they may be able to give you an idea of which benefits you would currently qualify for currently.

A helpful website for working this out is EntitledTo.  

This will help you to look at your situation now and what it would look like if you released funds from your property.

What is the maximum age for a drawdown mortgage?

With a drawdown mortgage, there is no maximum age. The reason is that with lifetime mortgage products, the older an applicant is, the more they may be able to release from their property.

So when it comes to drawdown mortgages, the lender only has criteria around minimum age rather than maximum age.

Depending on the applicant’s ability to understand the details of a drawdown mortgage, they may wish to appoint a power of attorney to deal with their finances. This website will give you more information on powers of attorney – AgeUK.

What are the impacts of a drawdown mortgage?

There are impacts and benefits if you release money from your property using a drawdown mortgage.

For example, releasing money from your property to increase your savings may mean you miss out on government benefits you would have got if you did not have these savings.

Another impact is the effect of compound interest if you choose not to make payments on the lifetime mortgage to keep the appeal at a level basis.

If interest is not paid, the mortgage will roll up over time to be redeemed when the oldest borrower goes into care or passes away.

As the loan balance gets larger, the effects of compound interest become more significant as the balance will increase by a more considerable amount each year.

Your equity release mortgage advisor will show you an illustration that demonstrates how compound interest on your mortgage balance affects things if your mortgage remains unpaid.

This means that the Equity within your property will be eroding over time as the loan rolls up. This is why professional advice is essential.

To discuss a lifetime mortgage’s full benefits and impacts, speak with a professional equity release mortgage advisor.

Should you take specialist advice for a drawdown mortgage?

As a drawdown mortgage is a lifetime mortgage product, it is not designed to be taken on a short-term basis.

As a result, careful consideration should go into the process if you are considering taking a lifetime mortgage.

The equity release market is complex, and there are many different products. Due to this, making sure that you pick the correct product most suitable for you is very important.

With this being a specialist area, getting advice from a competent and experienced equity release mortgage advisor is essential.

They will be able to discuss your situation and plans with you to make a recommendation accordingly.

Your equity release mortgage advisor will hold an additional qualification to a standard mortgage advisor, allowing them to advise on equity release mortgage products.

I NEED ADVICE can match you with a regulated equity release mortgage advisor if you complete the contact form.

Conclusion

A drawdown mortgage could be a good solution for a borrower over the age of 55 that wishes to release money sporadically over their lifetime.

However, equity release mortgage products are not suitable for everybody and can be expensive over the mortgage term due to interest rolling up if repayments are not made.

As an equity release mortgage is designed to be kept for a lifetime, you should think carefully about whether this is the correct route.

You should always take professional advice from a regulated and experienced equity release adviser if you consider going ahead.

If you would like I NEED ADVICE to match you with a qualified equity release mortgage advisor that can give you your options around drawdown mortgages and other lifetime mortgages. Please complete the contact form.

Your home may be repossessed if you don’t keep up repayments on your mortgage.

An equity release product will reduce the value of your estate, it will not be suitable for everyone and may effect your entitlement to state benefits.

To understand the risks please ask your mortgage advisor for a personalised illustration.

To find out up to date information about lenders and mortgage advice in general, contact a qualified mortgage adviser.