Lump sum vs drawdown 

Lump sum vs drawdown 

When considering equity release, it’s important to understand your options, including the flexibility of how you get your tax-free cash

With a lifetime mortgage, the most popular form of equity release, you can receive your money in a few ways, two of which are a lump sum or a drawdown.

 

Drawdown lifetime mortgage

With a drawdown lifetime mortgage, you hold the flexibility to release cash as and when you need it, rather than in one lump sum. Following an initial release, you can draw down all or some of the remaining funds available when needed.

A drawdown is ideal if you don’t need all your cash in one go. For example, if you’re able to release £86,000 from your property, but you only initially need £40,000 for home improvements, a drawdown may be more suitable for you compared to taking your money in one lump sum. Our free calculator shows how much you could release.

 

Lump sum lifetime mortgage

A  lump sum lifetime mortgage is somewhat self-explanatory. You receive your cash all in one go.

It’s perfect if you’ve earmarked your release for something specific, such as gifting the money to a family member or friend for a deposit on a new home.

But if you don’t need all the cash at once, there is another way.

 

Which is right for you? 

Depending on what you plan on doing with your tax-free cash will often decide which option is most suitable for you.

Features of a lump sum lifetime mortgage

Lower interest rates 

A lump sum plan can come with a lower interest rate compared to other types of equity release. This will reduce the amount you owe when it comes to repaying the lifetime mortgage when your plan comes to an end. That’s usually from the sale of your home when you pass away or move into long-term care.

Fixed rate for life

With a lump sum lifetime mortgage, your interest rate can be fixed throughout your entire plan, so there are no surprises and you can be sure you know what’s owed.

No monthly repayments

Typically, with any equity release plan, there are no monthly repayments for you to make. That’s because with a lifetime mortgage, the loan, plus roll-up interest, is repaid when your plan comes to an end. If you wish to make repayments to reduce the overall cost of your plan, however, you can.

Retain home ownership

With a lifetime mortgage, you’ll still own your own home. And the plan typically won’t come to an end until you, or the last remaining applicant, either passes away or enters long-term care.

No negative equity guarantee

At Key, we recommend plans that meet the Equity Release Council standards. That means you’ll never owe more than your home’s worth.

You can still move home

With lifetime mortgages that meet the Equity Release Council standards, you can still move home. That’s as long as your new property meets your lender’s criteria at the time. If it doesn’t, downsizing protection, which is available on some plans, allows you to repay your loan early without early repayment charges if you want to move property. It’s usually available after you’ve had your plan for five years.

You can leave an inheritance

With inheritance protection, which is available on some plans, you can ring-fence a percentage of your home’s future value to leave as a guaranteed inheritance.

Complete your tick list

With one lump sum, you can tackle your existing projects in one go. If you want to make home improvements, sort out existing debts, buy a more practical car and spend some time in the sun, for example, you could do all this at once.

 

Features of a drawdown lifetime mortgage

Lower cost over time

As you only pay interest on the amount you’ve released, a drawdown lifetime mortgage may lower the overall cost of borrowing compared to a lump sum.

Flexible access

With most drawdown facilities, you can access your tax-free cash as and when you need it.

Interest rates

With a drawdown lifetime mortgage, your interest rate is set every time you release tax-free cash from your home. That means you could end up with a lower interest rate on the subsequent cash you withdraw compared to your initial release. However, there is a possibility the interest rate could be higher.

No monthly repayments

As with a lump sum lifetime mortgage, there are typically no monthly repayments for you to make with a drawdown plan. Again, though, if you’d prefer to reduce the overall cost of your equity release plan, you can make either regular or ad hoc repayments with some plans.

Retain home ownership

Like a lump sum lifetime mortgage, you’ll still own your own home. And the plan usually doesn’t come to an end until you, or the last remaining applicant, either passes away or enters long-term care.

You can still move home

Like a lump sum, you can still move home after taking out a drawdown plan that meets the Equity Release Council standards if your new property meets your lender’s criteria at the time. Downsizing protection is also available on some drawdown lifetime mortgage plans after five years.

You can leave an inheritance

Inheritance protection applies to both types of lifetime mortgage. That means, with some plans, you can enjoy your cash today in the knowledge that those closest to you will still be cared for after you’re gone.

No negative equity guarantee

Drawdown lifetime mortgages that meet the Equity Release Council standards also benefit from the no negative equity guarantee, so you’ll never owe more than your home’s worth.

 

Things to consider before taking out a lump sum lifetime mortgage

 

May be more expensive

As compound interest will be rolled up on the money you’ve released, you may end up owing more if you take all your available cash in one go.

Limited flexibility

Unlike taking your money through a drawdown, with a lump sum, you can’t release further funds through your recommended equity release plan unless you apply for a further advance. Being able to do so is subject to the lender’s criteria and your property’s value at the time of application.

Reduce the value of your estate

A lifetime mortgage is a loan secured against your property. Taking an equity release plan reduces the value of your estate.

Your means-tested benefits may be affected

Taking out equity release may affect your current or future entitlement to means-tested benefits.

 

Things to consider before taking out a drawdown lifetime mortgage

Interest rates can be slightly higher

With a drawdown, your interest rate may be slightly higher compared to other forms of lifetime mortgage. This is typically due to the plan’s flexibility, although it’s not the case with all lenders. Some offer a drawdown plan at the same interest rate as a lump sum.

Drawdown facilities aren’t guaranteed

The lender can remove your right to draw down tax-free cash at any point. However, interest will only be applied to that cash you have released.

Reduce the value of your estate

With all types of lifetime mortgage, your estate’s value will decrease. Typically, the loan is repaid when your plan comes to an end through the sale of your property. You should always think carefully before securing a loan against your home.

Your means-tested benefits may be affected

Again, taking out equity release may affect your entitlement to means-tested benefits both now and in the future, regardless of the type of lifetime mortgage you decide to go with.

 


Call Giraffe equity release on 0800 622 6414 or send an enquiry here