Drawdown Mortgages

Thinking of releasing some equity from your home but want to do it over time rather than in a lump sum? Read our guide on drawdown mortgages.

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Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Updated: December 4, 2023

If you’re over 55 and could do with freeing up some extra funds – perhaps for a trip or as a supplement to your pension – but don’t want to sell your home, a drawdown mortgage, otherwise known as a drawdown lifetime mortgage, might offer a solution.

What exactly is that and how does it differ from a lifetime mortgage? How much would it cost you and is it worth the hassle? These are questions the guide below answers in full.

What is a drawdown mortgage?

Designed with older borrowers in mind, this type of mortgage is a form of equity release, allowing existing homeowners, with a property worth over £70,000, to access between 18% and 50% of the equity accrued in their home. But rather than being a one-off arrangement, as is typical of a lifetime mortgage, in a drawdown mortgage you can withdraw a small amount initially before setting the rest aside, in what’s called a reserve or mortgage drawdown facility, to be withdrawn in multiple stages. The idea is that you’re able to access capital as and when needed.

A broker would be able to share more about the nuances and help you decide whether a lifetime or drawdown mortgage might be best for you alongside other mortgages for older borrowers.

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How does the process work?

In short, a lender – either your current provider or a new one – allows you to release a certain percentage of the equity in your home. The specific amount will depend on each lender’s criteria and calculations. Many have their own drawdown lifetime mortgage calculators to give you an estimate of what they’d offer but rather than doing a search across each provider, a specialist broker would be able to assess your situation and share what they believe you’d be able to borrow.

Once you have an amount, you then choose how much you’d like to withdraw as a lump sum in what’s called an equity drawdown, accessing it in a matter of days, and how much you’d like to leave as a reserve to be accessed at various later points. Some lenders have limits on how many withdrawals you can make in a year and stipulate a minimum of £10,000 be taken out as the initial payment and £500 thereafter.

How does repaying the interest work?

The lender will set a fixed interest rate on each amount you withdraw. The rate is typically higher than a residential rate but in line with the market. This means it’s worth noting current interest rates before deciding when to access the funds. The compounded interest is usually then paid, alongside the remaining mortgage on the property, once the owner dies or transitions into a care home and the property has been sold. Alternatively, there is an option that allows interest to be paid over time.

How a broker can help you secure the best drawdown mortgage deal

Working with an expert can save you time and increase your chances of finding a good drawdown mortgage deal. If you get in touch the broker we’ll match you with will:

  • Already have an idea of whether you’d be eligible, how much you could expect to withdraw as equity and the best deal you could expect.
  • Compare what your current lender can offer in terms of rates and the equity amount to others on the market.
  • Provide their expertise on which lender to apply to, sharing insights on a suite of more specialist lenders you may not have access to otherwise.

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What are the benefits and drawbacks?

Easy access to money over the long-term and only paying interest on the amount currently borrowed rather than the reserve sounds like a great situation and it is, but there are important downsides to consider too, along with the benefits.

  • Access to tax free cash: The money you take from your property is tax free and easily accessible on a regular basis.
  • No need to sell: You’re able to stay in your own home and retain ownership all while having more access to money.
  • Repayments are not required: You don’t need to worry about paying the money back or missing payments and ending up in arrears.
  • No retirement benefit interference: The ability to manage how much of the reserve sits in your account means you can always remain under the threshold required for various retirement benefits such as a state pension.
  • More flexibility: With the option to receive the money in instalments, you can put more consideration into how it’s used with the possibility of using it as a supplement to any retirement income.

Which providers offer this type of mortgage?

In general, the number of lenders offering equity release is small and that reduces when you get to lifetime mortgages and more so with drawdown mortgages. There are, however, a good collection of others that do have this in their portfolio including Legal and General, Hodge Bank, One Life and Canada Life. They may be less familiar to you than the high street names but often have expertise in other retirement products.

The rates and amounts they’ll be willing to lend will then vary depending on their internal criteria and will be influenced by how much equity you have in your home, your age and how healthy you are. Oftentimes if you’re older and have health issues you can get a better rate. A broker would be able to help you find the best rate currently available for you and your circumstances.

Fees to expect

Most lenders allow borrowers to draw down free of charge but you should expect to pay set-up and administration fees as well as solicitor fees at the outset. Where there can be stipulations, however, is on the amount of money you can withdraw at once. Some lenders will set a minimum amount of £500 while others will raise that to £6,000. When deciding on which lender to apply to, it’s worth considering the size of withdrawals you’re likely to want.

Speak to a broker experienced in drawdown mortgages

As a seasoned homeowner, you may think you know all you need to do about mortgages but a drawdown mortgage is a different operation requiring knowledge of the current market and foresight as to how this will work for you in the future. This is why working with a broker is almost vital.

They’ll know which lender would be best for you and the amount you should be looking to release in equity. Through a quick free consultation, our experts can weigh in on whether you’re eligible and then offer bespoke guidance that’ll ensure you have both your home and the finance you need moving forward.

Call 0808 189 2301 or fill out this form to be matched with a broker today.

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FAQs

A self-build mortgage works similarly to a drawdown mortgage in that a borrower accesses their loan in various stages. In this case, however, the mortgage isn’t reserved for only those nearing retirement but it’s designed for those looking to build their own home. And rather than accessing the money at any time, it can only be drawn down at specific stages of construction. The typical self-build mortgage drawdown stages come just before:

  • A piece of land is ready to be purchased.
  • The foundations are ready to be laid.
  • The walls are to be constructed to the level of the roof.
  • The property is being made watertight and windproof.
  • The first fix and plastering is to be done.
  • The second fix is ready to complete the property.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

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