Why a Drawdown Lifetime Mortgage May Be Your More Favourable Scheme
Equity release schemes were launched by many companies to help people meet their financial requirements after their retirement by releasing the equity held in their home. Unluckily, most of the old equity release schemes turned out to be quite rigid in nature. In equity release schemes, people used to forecast their future fund requirements for the next five years and turn in an application to borrow a lump sum amount in a single transaction. Now there are plenty of choices like drawdown lifetime mortgages, interest only schemes, enhanced lifetime mortgages and others.
The basic drawback of equity release schemes was that the borrowers had to withdraw the complete amount in a single transaction, whether it was required at the time of borrowing or not. The new equity release schemes offer flexibility so that the borrower can withdraw funds as and when required. On the other hand, it wasn’t justified to pay interest on the sum that was only provisioned but not actually withdrawn. Freedom from paying tax on the provisioned funds was something that has remained steady.
The whole concept of equity release turned out to be faulty because the interest paid on any leftover fund was much higher than the interest yield earned from keeping it in the savings account. Somewhere in the year 2004, drawdown lifetime mortgages came to the rescue. Borrowers have all the features that were beneficial to them before but were not available with the regular non-drawdown schemes such as flexibility in withdrawing funds as and when required.
In other words, changes made to the lifetime mortgage options has ensured you have more flexibility today than you had ten years ago. You still obtain tax free cash. You now have the option of withdrawing only the amount you wish from the account and only paying interest on what is withdrawn rather than paying interest on the entire sum made available to you.
Plans are provided to consumers at the age of 55, but of course you can wait until you retire or are further in your retirement. Home equity release schemes were devised to give you a way to afford more during your retirement or to afford what you need in retirement. Sometimes savings do not go as far as we hop due to emergencies, family members needing help, and changes to the economy like inflation.
For those who have not prepared enough for their retirement drawdown lifetime mortgages might be a great answer. It is imperative that you consider all schemes available from the various companies offering such plans.
Just Retirement, Prudential and Hodge Lifetime came out with an innovative scheme and launched the much awaited drawdown lifetime mortgage for the first time in the financial market a few years ago. Borrowers were required to pay the solicitor’s fees as well as valuation fees right in the beginning of their application so that they can withdraw cash according to their requirements, without repeating any legal formalities again and again.
Looking at the high demand of these schemes in the market, many more equity release lenders such as Godiva, Aviva and Saffron Building Society also joined the market in launching drawdown lifetime mortgages on a large scale. The flexibility in drawdown lifetime mortgage also empowered the borrowers to pay interest, only on the actual cash withdrawn from the total amount of provisioned funds and not on the complete amount provisioned.
These plans are not for everyone. There is always a risk that inheritance will be reduced or become nil due to changes in the economy and housing values. As long as you speak with a financial adviser regarding your concerns, examine the plans with a keen eye without emotion, you can make the right decision for your situation.
Some things to keep in mind:
• Your housing value may change during your retirement period. You may find your home goes from £300,000 to £250,000 in value or perhaps up to £350,000. The valuation changes will impact the inheritance left as well as the equity in your home.
• With drawdown lifetime mortgages you have the option of reassessing your current plan and adding more funds to the account if equity is available. This can reduce the inheritance even more.
• If the amount owed on the drawdown mortgage becomes too large due to compounding interest and a large principle balance taken out, the house may need to be sold within 12 months of moving out of it for a long term care place or at your death.
As long as you keep these considerations in mind regarding drawdown lifetime mortgages you can make an educated decision.