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Equity Review | October 18, 2017

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Drawdown Lifetime Mortgage

Entering the age of retirement is often a worrying concept for many. Life never seems to go as planned. For some heading into retirement they know they have a retirement fund that if used correctly will remain available for a limited time and may need further financial assistance along the way. They have retirement funds, but most of their hard earned money is locked away in assets like home equity.

Therefore, they have limited need for a cash lump sum now apart from maybe a new car or home improvements, but further down the line they may need extra income or access to a capital amount to support their standard of retirement living in the future. In such circumstances a drawdown lifetime mortgage can help in this situation. It is a mortgage product that releases equity gradually, thus enabling people who need fast access to cash on a ‘little & often’ basis have a cash reserve fund they can access whenever they require.

What is a Drawdown Equity Release?
Drawdown equity release is one of four lifetime mortgage options for retirees. It is a type of lifetime mortgage scheme where an initial lump sum is taken to cover any immediate expenditures encountered. Following the initial tranche of money taken, the homeowner can then withdraw further funds from an equity release facility as they need it. Other lifetime mortgage options include roll-up, enhanced ill-health and interest only, which make up the four options available.

The drawdown lifetime mortgage loan runs for the rest of their life with the interest compounding each year, evidenced by the homeowner on their annual equity release statement. Upon the death of the surviving partner, or them moving into long term care, the property is usually sold & the equity release company repaid from the proceeds. Any remaining cash is passed into the estate & divided between the heirs.

How do Drawdown Cash Facilities Work?
Various equity release companies offer drawdown lifetime mortgage products. The initial lump sum amount is often between £10,000 & £15,000 & can depend on the size of the overall maximum facility provided by the equity release company. Hence, it’s always wise to check with you equity release adviser. The initial lump sum amounts mentioned here are minimums. It is up to the homeowner to decide the maximum amount of funds they need in the first 12 months and the request it to be released via the equity release application.

This type of lifetime mortgage is the most flexible because of the drawdown facility. Once the initial sum is taken, homeowners can withdraw funds at any time and as frequently as they wish, as long as there are still funds in the cash reserve facility. When removing funds after the initial draw some of the providers have a minimum withdrawal amount ranging from £1,000 to £5,000. Most lenders do not charge any further administration fees for subsequent drawdown releases, however a couple do, thus this should be considered in the whole scheme of costs.

The total amount released from equity and made available in the drawdown account is dependent on the home value and property owner’s age. Based on individual lender criteria, they will calculate how much of a cash facility they are prepared to grant. The homeowner then decides on the initial draw, with the remaining balance not taken being left with the equity release provider & is NOT charged interest whilst sitting with them. The only time any interest is charged is once any funds are withdrawn.

The age requirement starts at 55 and may have a cap of 90 or 95 depending on the provider. Some do not list a maximum age. The age is used to determine life expectancy. A person age 55 in theory will live longer than someone who is 75. The calculation of maximum released funds is based on the life expectancy, thus more funds are provided to a person who is older versus the younger homeowner.

Property value tells the lending company the amount of equity available in the property. The home equity is current market value minus outstanding loans. It is assumed that retirees own their home in full; however, there are special cases where a lifetime mortgage pays off an existing mortgage. Additionally, a lifetime mortgage a secured loan on the property. Therefore, the homeowner still retains 100% of the property’s value in the future.

Equity release companies are not going to release 100% of the property value. They calculate a percentage of value based on the age, overall property value and compounding interest.

Loan to Value Percentage Explained
The percentage of value is called Loan to Value or LTV. Interest is a part of any mortgage including this form of retirement mortgages. The annual percentage rate is usually fixed on the initial lump sum taken. Various providers offer different options for future withdrawals where the rate may be the current market rate rather than the original fixed rate. Therefore, different tranches of money are likely to have different interest rates attached.

Equity release providers must account for interest accrual based on UK regulations from the Financial Conduct Authority and Equity Release Council Code of Conduct. Both require a no-negative equity guarantee be attached to the equity release. This guarantee states the interest compounded onto the loan plus the balance of the mortgage cannot exceed 100% of the home value. This ensures that any beneficiaries cannot be left with any money owing to the equity release company.

Inheritance Protection Wrapped into the Loan
Drawdown lifetime mortgages only accrue interest on the portion of tax free cash withdrawn from the cash reserve facility. Any funds remaining in the account at death or move to a care facility are considered a part of the home assets. When the home is sold to repay the loan any unused equity and value appreciation is given to the beneficiaries once the principle balance and interest is paid. It is in a way inheritance protection.

Drawdown lifetime mortgages suit retirees looking for cash amounts in the future, but at this stage these dates or amounts would be unknown. The drawdown equity release system therefore accounts for the unplanned nature of retirement & the random expenditure periods a homeowner could encounter.