What is a Drawdown Mortgage?
A drawdown mortgage is a form of equity release that allows you to unlock the equity in your home as and when you require. As you only pay interest on the funds that you actually withdraw, a drawdown lifetime mortgage, as it might also be called, means you may spend less on interest overall.
A drawdown mortgage provides a way for older homeowners to release equity built up in their property in stages, as and when it is needed, while remaining in their home. As a result, this type of lifetime mortgage might be used as a means to supplement your usual retirement income or simply to provide an occasional cash boost.
Drawdown mortgages are sometimes also called drawdown lifetime mortgages or flexible drawdown mortgages.
How does a drawdown mortgage work?
A drawdown mortgage is a type of lifetime mortgage, and therefore also a form of equity release. This means you must be at least 55 years old and either own your home, or be a good way towards paying off your mortgage, to take out a drawdown mortgage.
With a drawdown lifetime mortgage in place, you continue to own your home and are responsible for its maintenance, but can unlock some of the equity you hold in it. How much you’re allowed to take overall – your reserve – will be agreed with your lender at outset. From this, you can withdraw an initial lump sum and then have the option to release further cash as required (subject to the overall amount remaining within the agreed reserve).
You might want to receive a set amount regularly as a top-up to your retirement income, or you may prefer to take whatever you need on an ad hoc basis (albeit in line with any minimum amount a lender might specify).
» MORE: Lifetime mortgages explained
Drawdown lifetime mortgage interest rates
You only pay interest on the funds that you’ve drawn down, and not the reserve that is untouched. As a result, your debt should grow slower than if your only option for taking funds is as a one-off payment, on which you’d pay interest on the entire amount from the very beginning, as you would with a lump sum lifetime mortgage.
A drawdown lifetime mortgage with a reserve will tend to charge a higher interest rate on your initial withdrawal than if you opted for a lump sum plan. The rate you pay on future withdrawals will then depend on wider market rates when you make any request.
Interest rates on drawdown mortgages are fixed, as are the rates on additional withdrawals. However, generally you can expect the interest rates on any lifetime mortgage to be higher than on a traditional residential mortgage. The rolling up of interest on top of interest can also see your debt grow rapidly.
How is your reserve calculated?
The size of your reserve – or how much equity you’re allowed to release overall – will generally depend on your age and your property value. The loan-to-values offered by drawdown mortgage providers increase in line with age, so the older you are, the higher the percentage of your property value you’re able to borrow.
If you have certain health conditions or lifestyle choices (such as being a smoker), you might be eligible to borrow more.
Once your overall reserve facility has been agreed, you take an initial lump sum and can then draw down from the remainder of your facility as you see fit. Some lenders will allow indefinite access to the reserve, while others might set a date beyond which its availability will end. Some drawdown mortgage providers might retain the option to limit your access to the facility, perhaps if interest rates rise significantly or problems beset the housing market.
Should you want to increase your reserve at a later date this may be possible, but there are no guarantees that your lender will agree.
When do you repay a drawdown mortgage?
As with any lifetime mortgage, the loan and interest from a flexible drawdown mortgage only needs to be repaid once the last surviving borrower moves into permanent care or dies, and the home is sold. However, some drawdown mortgage plans will offer the option for you to pay some or all of the interest as you go, which will lower the cost of the mortgage overall.
If there is money left over from the sale of your property once everything has been repaid, this can be passed on as inheritance. It is usually a good idea to use a provider that is a member of the Equity Release Council, as this means you’ll be protected by its no negative equity guarantee – this ensures that the amount to be repaid will not exceed the value of your property, protecting your beneficiaries from having to settle any additional debt.
» MORE: Learn about negative equity
Pros and cons of a drawdown lifetime mortgage
As with any form of equity release, it is vital to consider the benefits but also the potential drawbacks of drawdown lifetime mortgages.
Advantages of drawdown mortgages
- It offers flexibility to access cash as and when you want.
- Interest is only payable on the money you take, not the funds that remain in reserve.
- The funds you unlock are tax-free and can be used as you wish.
- There are no monthly repayments (unless you want to) and so no affordability checks; everything is paid back when you die or go into care.
- You still have full ownership of your home
- Taking a plan with a no negative equity guarantee means your beneficiaries won’t be left with any debt to pay back.
- Some drawdown mortgages offer inheritance protection, ensuring that something will be passed on to your beneficiaries.
- Withdrawals can be managed so as not to affect eligibility for means-tested benefits.
Disadvantages of drawdown mortgages
- Debt can accumulate quickly, particularly if you don’t repay any interest as you go.
- Every withdrawal will lower the amount you can pass on as an inheritance.
- The interest rates on drawdown mortgages are often higher than on lump sum plans.
- Interest rates can be different for each withdrawal, and potentially rise or fall depending on wider market rate movements.
- Withdrawals are likely to be subject to minimum amounts, and may be limited to a certain number across a set period.
- If you want to increase your reserve, you’ll usually need to apply again with no guarantee of success.
- If you want to pay off the loan early, there may be significant early repayment charges that you need to pay.
- There is a possibility the money you release could affect your tax status and entitlement to means-tested benefits.
- There can be various fees involved with taking out a drawdown mortgage, including arrangement and completion fees on the plan itself, and adviser and legal fees.
- All lifetime mortgages can have an impact on inheritance, tax and benefits.
» MORE: Is equity release safe?
How do I get a drawdown mortgage?
If you want any form of lifetime mortgage, you’ll need to be at least 55 years old and a homeowner. Ideally, you’ll own the property outright, but if you still have some existing mortgage on your home, this will need to be paid off using some of the funds that you release.
Crucially, you must take financial advice before being allowed to make use of any form of equity release. A financial adviser will help you decide if equity release, and a drawdown lifetime mortgage, is suitable for you. If your adviser thinks you’re better looking elsewhere, they can direct you towards alternatives to equity release. Legal advice must also be sought.
Drawdown lifetime mortgages are the most popular form of equity release, and there are plenty of lenders that offer various types of plan. Some are equity release specialists, while others are more familiar insurers and high street banks.
» COMPARE: Lifetime mortgages
Image source: Getty Images
Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more