If you are approaching retirement age, it’s crucial you get your finances in order so you can enjoy a relaxing, trouble-free time once you stop working. But with the average UK pension equating to £61,687, many may find that their pensions are not large enough to support their standard of living.
One way to increase the amount of money you have available during retirement is a drawdown lifetime mortgage, but what are they, and how can they benefit you?
What is a drawdown lifetime mortgage?
A form of equity release, drawdown lifetime mortgages are a type of mortgage that allows you to exchange part of your home’s value for a tax-free initial lump sum, followed by smaller payments if and when you require them.
This is compared to the other main type of equity release product, a lump sum lifetime mortgage, which gives you a typically large, single tax-free lump sum.
You have to be aged 55 or over and own your home outright to qualify for a drawdown lifetime mortgage. The amount you can receive is worked out by the lender, based on your age, health, and the value of your home.
Once you take out a drawdown lifetime mortgage, you are charged interest on the sums that you choose to receive – once the lump sum is taken, the rest is held in a cash reserve so you can ‘draw’ it ‘down’ when you need it.
The lump sum and further payments, plus interest, are paid back when you sell the home, usually when you pass away or enter full-time care. That means there are no monthly payments.
What are the benefits of drawdown lifetime mortgages?
Drawdown lifetime mortgages are a good option for older people wanting to supplement their pension income, tax-free.
They provide varied options when it comes to withdrawing your home equity – for emergency spending, for instance – as you only pay interest on the money you withdraw from the cash reserve, not the reserve itself.
They can help you preserve more inheritance for your heirs compared to other equity release products and let you benefit from house value increases. They can improve your access to means-tested benefits if you have a good understanding of your yearly allowances too.
Depending on the lender, you may even be able to move to a new house while you have a drawdown lifetime mortgage withdrawn, and many come with a no negative equity guarantee, which means you won’t ever owe more than the worth of your home, protecting your heirs from paying off your debts.
Drawdown lifetime mortgages are a good option for those that wish to unlock the value of their home during retirement. If you are considering one, however, always do your research to ensure they are right for you and assess the long-term financial implications before you apply.
