Drawdown Lifetime Mortgages
Lifetime mortgages come in many different packages from no monthly payments to maximum lump sums. The drawdown lifetime mortgage is only one of the four scheme types available. Its main feature is the cash reserve facility. Rather than the homeowner taking out an entire sum of money which earns interest each year, the drawdown mortgage allows homeowners to take what they need as they require it.
An in-depth look at drawdown schemes
A drawdown scheme has two parts: the initial release of cash and the subsequent withdrawals. There are rules the lenders set which govern how this process works. The beginning lump sum must meet a minimum requirement of at least £10,000. There are certain packages on the market that have a higher minimum going as high as £25,000. The minimum amount is what the homeowner must take to complete the equity release process.
Once the initial sum is taken clients can decide to withdraw any further funds whenever they, but there is at least one on the market willing to provide more money after only 6 months so check first.
Any additional withdrawals taken out of the reserve account will also need to meet a minimum. The minimum is much smaller ranging between £1,000 and £5,000 depending on the equity release company lending the money.
There are no monthly repayments required on this loan. The compounding interest will accrue on the principle sum taken and any further withdrawals. The total of these equity release withdrawals plus interest is all repaid at the end of the loan term. The loan term is defined as death or move to residential care facility. It can also come due if the house is no longer the main residence, although there are exceptions to this rule. Some companies allow the mortgage to move with the client if they downsize or they might have the loan on their second home. There is at least one company that allows drawdown mortgages on a 2nd or holiday home.
Qualifying parameters for drawdown lifetime plans
Homeowners need to qualify for the loan like any other financial product, although the qualification process is slightly different. Most loans look at age, health and property value. With these retirement products, it is mostly about age and property value.
With a loan outstanding until death, companies have to wait for their return on investment. They could be waiting as much as 45 years depending on when the loan is taken out. They also have certain regulations to meet as laid out by the Financial Conduct Authority and a code of conduct from the Equity Release Council (formerly SHIP).
Products vary however the lowest minimum age a person can be is 55. There are several products that start with a minimum age of 60 even a few starting for 70 year olds. This is one comparison factor for you to eliminate some products right away. There are occasional maximums in age like a person age 91 may not have access to this type of mortgage. Check with your independent equity release adviser.
For property value the minimum with some companies begins at £60,000. However, most companies require at least £70,000. During the calculation the equity release company wants to make certain your home has enough worth for the fixed interest rate accrual for the minimum release amount.
The main factor in the calculation is to ensure there will be no negative equity in the future. This important rule of the Financial Conduct Authority states no sum plus compounding interest can reach a negative equity situation. To avoid this drawdown lifetime mortgage products offer a reduced loan to value percentage over the property value all based on age. The older a person is the higher the loan to value percentage on the assumption the funds will be returned much earlier.
Drawdown lifetime mortgage calculator
Inheritance protection and equity release incentives
To make products more alluring equity release companies offer incentives. Incentives range from free valuations up to a certain home value to cash back offers. There are enhanced interest rates on certain products. This incentive is offered to those with ill health who want a drawdown mortgage.
It is possible to request inheritance protection beyond the drawdown scheme. A drawdown lifetime mortgage has some protection built in. The fact that you can leave funds in the facility unused means there is potential to leave funds for your heirs. The maximum amount you take can be less than the one provided by the company to be put into reserve too. However, if you want more protection you can ask for a guarantee to be added. In this way the funds are not calculated as part of the available loan amount.