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Throughout the history of equity release schemes, the drawdown lifetime mortgage has become the most important and influential product conception. The ingenuity behind drawdown lifetime mortgages is their flexibility and ability to be used as a future planning tool that can be moulded to the customers’ needs.
Let’s see why the drawdown lifetime mortgage is now the most popular form of equity release..
Historically, equity release schemes have been noted for their rigidity & uncompetitiveness. Older equity release plans were a simple one-off lump sum transaction, whereby the application for funds was calculated on how much cash was required over the next 5 year period. Therefore, inaccuracies were immediate as who could honestly say exactly how much would be spent & on what over the next 5 years?
Not only that, but it was not best equity release advice to take a large lump sum, only to leave it sitting in a bank account attracting less interest than that being paid on the equity release scheme itself. Remember older equity release mortgages had interest rates over 8% and it’s been some time since returns on savings accounts exceeded this level!
Another reason at that time for applying for a 5 year tranche of money was the inflexibility of taking further borrowing from equity release plans. As an example the older Norwich Union equity release schemes would allow additional borrowing once the plan had been in force 5 years. So there were no options in the meantime should an unexpected event arise where emergency cash was required.
Something therefore needed to be developed to help the equity release market move forward and create greater flexibility and customer confidence.
Original conceived around 2004, the first companies to launch a drawdown equity release plan were companies such as Prudential, Just Retirement and Hodge Lifetime. Further equity release lenders such as Aviva, Saffron Building Society and Godiva followed suit later, once the concept had been fine tuned.
Simple in concept and similar to an annuity drawdown plan, the theory is that by creating an overall cash reserve facility, you can then take out of it as much, or as little as initially required.
A 65 year old applies for a drawdown lifetime mortgage with a property value of £200,000. Based on these figures he could receive an overall cash facility of £53,000 with Just Retirement.
He only needs £20,000 now to purchase a new car and clear some debts. However, he also stated that next year he wished to help his daughter to get married, for which he would need a further £10,000.
This kind of scenario is where drawdown works. In practice he would therefore apply for the £20,000 & Just Retirement would also provide him with an additional cash reserve facility of £33,000 which is the unused cash. The plan starts and he only gets charged interest on the initial £20,000 taken.
Next year, he then re-approaches Just Retirement for the additional £10,000 required for his daughter’s wedding. Following a simple phone call, Just Retirement sends the relevant paperwork out, which he then signs & returns. There are no additional costs for the further cash withdrawal as no solicitors fees or valuation fees are to be incurred as the drawdown facility was already in place.
Within 10 working days the £10,000 was in his bank account ready to assist his daughter & give her the wedding present he had planned for a year earlier. He now has £23,000 still left in his drawdown reserve facility which he can take at anytime in the future, if required.
The main advantage of taking equity release this way is that interest is only charged by the lender on the amount actually withdrawn. Therefore, no interest is levied on the remaining cash in the facility. This saves money over the longer term which is beneficial not only for the planholder, but also the beneficiaries as they effectively could be left with a greater inheritance.
These are some of the reasons why the drawdown lifetime mortgage plan has become the mainstay in the equity release marketplace.
The www.drawdownlifetimemortgage.com website is dedicated to providing the over 55’s with information to make an informed decision as to whether this product is suitable for them. Remember however that equity release is a big decision and would recommend that you always seek the services and advice from an independent equity release adviser.
These are lifetime mortgages and home reversion plans. To understand their features and risks, ask for a personalised illustration.