Drawdown Mortgage (A 5 point guide)
In this brief guide, we will cover what a drawdown mortgage is, its features and if drawdown mortgages may be suitable for you.
What is a Drawdown mortgage?
A drawdown mortgage is a mortgage which lets you drawdown funds as and when you need it. Drawdown mortgages usually refer to drawdown lifetime mortgages which are a type of equity release product. Drawdown mortgages aren’t limited to equity release products as there are other mortgages which act with a similar drawdown facility e.g self build mortgages.
A drawdown lifetime mortgage lets you take cash from your home as and when you want it rather than taking a simple lump sum.
Lifetime mortgages are a type of equity release product which allows you to release the equity from your home in one lump sum or through a drawdown. You make no monthly repayments towards the equity you have released but rather the balance owed to the equity release lender is retrieved by selling the home when you die or move into long term care.
When looking to get a lifetime mortgage, the equity release lender will be less concerned with your mortgage affordability and more concerned with your age, if you are a UK resident, the property type( non-standard construction properties may find it harder to get equity release products), if you have any illness, how likely you are to live and the amount of equity you have in your home.
How does a drawdown mortgage work?
A drawdown mortgage or drawdown lifetime mortgage works just like a normal lifetime mortgage.
The eligibility requirements are the same but in the case of a drawdown lifetime mortgage rather than get one lump sum you will get an allocated amount which you can drawdown which will be put in a reserve and you will also be able to take an initial lump sum.
Some equity release providers will insist that you take a minimum amount in your lump sum while the rest is kept in a reserve which you can draw from
You can then draw down more money as and when you need it but there may be limits to the minimum you can withdraw and the maximum you can withdraw.
There may also be fees for every time you withdraw from your reserve
Once you withdraw from your reserve interest will then be charged to the amount you have just drawn down including previous interest charges.
Interest is not charged to the whole reserve but only the amounts you have initially taken as a lump sum and any further drawdowns.
There is no interest to pay as the interest in a lifetime mortgage is rolled up and paid at the end when you die or move into long term care.
There are some benefits over having a drawdown lifetime mortgage than a lump sum lifetime mortgage. These include:
Drawdown lifetime mortgages reduce the amount of income tax liability you may face as you don’t have to take all the money in one lump sum in one year.
Drawdown lifetime mortgages also reduce the amount of interest you may need to pay on your lifetime mortgage as you don’t have to pay interest for cash you have taken out in one lump sum which you may not be using but rather you can take out cash as and when you need it. This means you reduce the amount of time you are paying interest on idle cash which you don’t need.
Drawdown lifetime mortgages are also very flexible and allow you to be able to get cash when you need it without too much cost to you.
Drawdown lifetime mortgages also allow you to increase the likelihood of your family receiving an inheritance from you as you reduce the amount of interest you pay and therefore increase the likelihood of leaving money back for your family.
Drawdown lifetime mortgages, in contrast to lump sum lifetime mortgages, allow you to reduce any impact on means testes benefits which you may claim by controlling the amount of cash you have.
Should you get a drawdown mortgage?
Once you have reached later life or you are considering retiring, a source of income may be the first thing on your mind. Whilst your pension may provide steady income it may not provide the adequate level of income you need to live a prosperous and fulfilling life.
In this case, you may consider equity release products and how they could provide you access to cash. Drawdown mortgages are a type of equity release product that almost goes a bit further in the amount of flexibility it provides you.
As long as you are over 55, have a property that is worth at least £70,000 and are a UK resident then you may be able to find equity release lenders willing to consider you for a drawdown mortgage. You may even be able to find equity release lenders who will consider you for a drawdown mortgage with lower requirements than the ones stated immediately above.
As a drawdown mortgage is a type of equity release product you won’t have to pay any monthly mortgage repayments or go through a mortgage affordability check to see if you are eligible.
The money you get from a drawdown mortgage is also yours to spend in any way you see fit.
If you are considering a drawdown mortgage then you should speak to a financial advisor who may be able to advise you on your potential lending options.
Advantages of a drawdown mortgage
You get access to tax-free cash( although income tax may be due based on the amount you draw down. Seek independent financial advice)
There is no monthly repayment with a drawdown mortgage as the balance of the drawdown mortgage is repaid when you die or move into long term care.
You can still move homes with your drawdown mortgage. Just speak to your equity release provider to discuss your options.
Drawdown mortgages could ensure that your estate receives a greater amount of inheritance when compared to other equity release products.
You can continue to live in your home with a drawdown mortgage until you die or move into long term care.
Drawdown mortgages can be offered by equity release providers who are members of the equity release council who provide a no negative equity guarantee which states simply that what you owe on your equity release product will never be more than the value of your home.
Interest is only paid on the money you have drawn down from your equity release product. This means you can significantly reduce the amount of interest you are charged by only drawing down money when you need it.
disadvantages of a drawdown mortgage
Interest charged on a drawdown lifetime mortgage is the same as that charged on a lifetime mortgage. This means it is compounded and can increase the amount you owe to the equity release provider quite quickly even with a drawdown mortgage.
As interest compounds with a drawdown mortgage, you may still find that your family doesn’t receive any inheritance from your property even with a no negative equity guarantee
Drawdown lifetime mortgages may still impact your eligibility for means testes benefits and so you may want to consider getting independent financial advice before getting a drawdown mortgage.
Some equity release providers will charge you a fee for drawing down from your cash reserve.
There will usually be minimum and maximum amounts which you can drawdown from your mortgage.
Some equity release providers will not guarantee that the cash reserve will be available to you at all times. In some cases, they may take away some or all of the cash reserves which were available for you to drawdown by citing a bad housing market or an increase in the bank of Englands base rate.
Some equity release providers will also have a minimum limit on the amount you can take out initially in a lump sum from your drawdown mortgage.
You may find that the maximum amount you are allowed to borrow with a drawdown lifetime mortgage may be much smaller than what you may have been able to borrow from a lump sum lifetime mortgage.
The equity release provider may also place limits to the number of times money can be drawn down per year.
The drawdown mortgage may reduce the value of your estate and affect your eligibility for means-tested benefits.
Different interest rates can apply to new withdrawals as the prevailing interest rate at the time you drawdown funds may be different to the one which you had when you initially got the drawdown lifetime mortgage.
Interest rates on drawdown lifetime mortgages can also be slightly higher when compared to other equity release products.
If you want to pay off the drawdown lifetime mortgage you may find that there are high early repayment fees.
Alternatives to a drawdown mortgage
If for whatever reason you find that a drawdown mortgage isn’t for you then there are other equity release products aside from the conventional mortgage products that you may want to consider.
Home reversion plans
With a home reversion plan, you sell all or some of your home to an equity release provider and continue to live there rent-free till you die.
With a flexible lifetime mortgage, you can choose to make voluntary payments to bring down your mortgage balance and hence pay less interest on the lifetime mortgage.
Enhanced lifetime mortgages are mainly for people with medical conditions who don’t have much longer to live. With an enhanced lifetime mortgage you can unlock more money from your home and potentially get better interest rates.
With a roll-up lifetime mortgage you essentially get a lump sum lifetime mortgage with no monthly repayments. The interest is compounded and rolled up and paid off when you die or move into long term care.
With an interest-only lifetime mortgage you get a lump sum from some of the equity in your home and then you can make monthly mortgage repayments which repay some of the interest element on your lifetime mortgage. This means you end up paying less in interest over the term of the lifetime mortgage.
You may also want to consider retirement interest-only mortgages.
Drawdown mortgage FAQs
Below we will answer some of the most common questions we see about drawdown mortgages. If there are any more questions you may have or want us to include in this drawdown mortgage guide then please drop us a note.
Can I get a drawdown mortgage with bad credit?
Yes, you may find it possible to get a drawdown mortgage with bad credit issues as this is because most equity release providers will usually only consider circumstances outside of your credit rating such as age, amount of equity in the home, property type etc.
What fees do drawdown mortgages have?
Drawdown mortgages may have fees such as set up fees, admin fees, other related lender fees, solicitor fees and even advisor fees.
Are drawdown mortgages for self-build properties?
Yes, drawdown mortgages are essentially what self build mortgages are. This is because the money is given to you at stages of your self-build development and not in one large sum so in some ways you drawdown the funds from the mortgage as soon as you hit your development milestones.
Getting a drawdown mortgage on a non-standard construction property may be much harder as many lenders will prefer properties where they have some idea of what the market value will be in the future and how they will perform in bad housing markets.
Non-standard construction properties may, therefore, be harder to get a drawdown lifetime mortgage on.
How long does it take to drawdown funds from your mortgage?
It should take between 1 to 7 days at the very maximum to drawdown funds from your mortgage.
Can you drawdown money from your pensions to pay off your mortgage?
Yes, you can drawdown money from your pension to pay off your mortgage but you may want to seek independent financial advice.
How much equity can you release with a drawdown mortgage?
The amount of equity you may be able to release with a drawdown mortgage will depend heavily on your own circumstances. How old you are? How much equity you have in the property and if you have any illness that may reduce the span of your life. You can usually expect to release between 20% and 50% with a drawdown mortgage.
The loan to value rates may range from between 40 to 55% but this will all be based on your personal circumstances. The younger and fitter you are the higher the loan to value on a drawdown mortgage.
Use a mortgage broker for your mortgage in principle
You may want to use an independent mortgage broker to help you get a mortgage on your new home.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.
This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.
It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.
They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.
This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.