Lump-sum or Drawdown

There are many different variations to a Lifetime Mortgage that can provide choice and flexibility. However, it’s important to choose options that work for you rather than options that would be nice to have. Generally, the more options you choose will limit the number of providers and could affect the interest rate.

These first two options are fundamental to any borrowing.

Lump-sum.
This is where you take a single one-off amount. Whenever you’re considering how much money you want, it’s important not to take any more than you need for say the next 12 to 18 months. If you’re borrowing money at 3% and putting it into a deposit account at 1%, you’ll be losing money.

Once the money’s been spent there’s normally an option to go back to the lender to see if there’s a possibility to take more. This is called a Further Advance and will usually need a new valuation and require that you take advice so there will be some fees to pay.

Drawdown.
Again, you take what you need now, but have a pre-agreed reserve amount that you can drawdown whenever you want. If you never need the reserve you won’t get charged interest on it, it’s just there in case of need.

As an example. You want to borrow £20,000 to provide a gift to your son to help him onto the property ladder now. You also want to install a new kitchen at £10,000 and have the house redecorated £5,000. Total, £35,000 plus costs and charges, say £2,500. However, you see you might want to replace your car in a few years and have an extended holiday. You would also like to pay for your grandchildren’s university fees as they fall due.

What we would do in these circumstances is work out what you could borrow in total at the youngest applicant’s age and based on the property value. Let’s just say that could be a total of £67,000. We could provide the initial release needed of £37,500 and leave a reserve of £29,000 in the kitty so to speak. At the time of writing, September 2020, the interest rate for the initial advice could be less than 2.5%.

Most customers don’t want or need the maximum reserve so will choose an amount they’re comfortable with. In addition, whilst we know what the rate of interest will be for your initial £37,500, we don’t know what the rate will be on future withdrawals. Interest rates are based on then-current market conditions and could be higher or lower than the initial amount. There are no other costs associated with the drawdown facility.

When you need to draw funds you phone the provider directly, and they’ll tell you what the then-current rate of interest is. If you’re happy, the lender will send the money, usually electronically within about ten days.

Getting the right blend of initial advance and drawdown facility is a balancing act and is the responsibility of your adviser to thoroughly discuss your current needs and expectations in the future.