What is drawdown equity release?
Drawdown lifetime mortgages are one of, if not the single, most popular form of equity release products currently available. There most noteworthy feature is flexibility, which makes them very attractive to any homeowner who both wants to enjoy the extra cash an equity release can provide them but also has overall concerns related to the effects of interest.
In addition, many homeowners benefit from the functionality of the drawdown lifetime mortgage since they can help to eliminate any negative potential impacts on means-tested benefits.
History of the Drawdown
In years past, equity release schemes were far from flexible. In fact, the most common equity release scheme for quite some time was the home reversion. Given the popularity of lifetime mortgages, home reversions, though still useful are not even close to as commonly used as lifetime mortgages. When some people think of lifetime mortgage plans, they automatically conjure ideas of the lump sum plan and while that plan does still exist and does work well for some homeowners, things have changed quite a bit with the introduction of different plans, including the drawdown.
The drawdown plan brought lifetime mortgages to a new level of flexibility, leaving the rigidity of old schemes behind. These plans were first introduced in 2004 and were an innovative addition to the equity release marketplace, immediately popular with homeowners who were unsure how they felt about receiving a one-time large lump sum. While still straightforward and easy to understand, the drawdown plan introduced concepts that were brand new to the world of lifetime mortgages. To this day, they remain popular and very commonly used by homeowners who want to enjoy the extra cash during their retirement but want the flexibility of using money only as needed.
Function of the Drawdown Plan
The basics of a drawdown plan function quite simply. You are approved for your equity release amount but instead of having to take it in one large lump sum payment and pay interest on the full amount starting right away, you can take smaller payments over time. This benefits you quite substantially in the long run since you will only ever pay interest on the funds that you have already withdrawn. So, if you decide to leave money in the cash reserve facility, you aren’t charged interest on it, but yet it is always there if you need it. Cash typically only takes a matter of weeks to receive so you never have to wait too long to get your cash.
A sample scenario
Perhaps you know that you need a significant amount of cash for a large purpose. Maybe you want to buy that car you could never afford before or you want to go on the fancy vacation you’ve dreamed about for so long but could never get enough time off work to enjoy. So, you know you need that money right away. However, you also know in the next year or so, you’re going to want to take out another amount of cash to help your grandson purchase his first car.
This is the exact scenario for which the drawdown plan is most useful. You can withdraw the amount you need right now and then keep the rest of the loan for which you’ve been approved in your cash reserve facility. When your grandson needs to purchase his car in the next year or so, you can withdraw that money then. And it is only then that you’ll start accruing interest on it. You won’t have to pay interest on that money while it sits in the reserve facility.
The biggest advantage of the drawdown plan is that you only incur interest on the amount of cash you’ve withdrawn. Another benefit of the drawdown plan is that you don’t actually have to know how much money you need when you first receive your offer from the provider. You don’t have to take the money all at once, like you would with the standard lump sum plan, so you can choose to just take money as needed. Again, you aren’t charged interest on what you don’t take so you can capitalize on the extra freedom of taking out smaller amounts just as you need them.
Finally, the third large benefit of using a drawdown plan is that it is less likely to impact your means-tested benefits. You aren’t likely taking really large amounts all at once, as you are taking several smaller payments with this plan. Hence, you aren’t likely to breach the guidelines of the Department of Work and Pensions. With this type of plan, it is much easier to avoid losing any means-tested benefits that you may already be claiming.