Lifetime mortgages vary making it possible for a variety of consumers to find a financial product that can help in their retirement. The drawdown lifetime mortgage is one option made available to you and it differs from the standard lifetime mortgage or home reversion choices you have.
With a drawdown lifetime mortgage you are still able to release money that is tax free just like a standard lifetime mortgage. The principles with a drawdown mortgage are the same in that you still own your home and you are not expected to make any regular payments. The main difference is that you can access the money that you want to release more flexibly.
This means that you do not get your money as one large sum but you can withdraw it as and when you need it. Also, you will only pay the interest on the money that has been withdrawn and not the entire amount. When your home is sold, the loan and the interest on the money that you withdrew are paid back.
Drawdown lifetime mortgage advantages:
1) This option is available at 55 years old; home reversion policies are not.
2) Money is tax free, available to you to spend as you need it, when you need it, and how you might need to use it.
3) You pay interest on the funds you withdraw and use, not on the whole amount available.
4) Payments are due when you move out to a care facility or pass.
5) There is a chance to protect your family’s inheritance.
6) The FCA (formerly FSA) regulates all lifetime mortgages including the drawdown option.
Disadvantages of Drawdown:
1) Your mortgage can increase over time due to the compounding interest, which can eliminate any inheritance you wanted to leave your family.
2) You may also need to release more equity in your home, which is dependent on the home values and inflation changes.
3) If you undergo a second application to release more equity there is no guarantee it will be accepted.
The above are some notable disadvantages to the drawdown lifetime mortgages. Your mortgage size may increase over time thus you might need to apply to release more equity than you initially thought and it cannot be guaranteed that the application will be accepted. This affects your inheritance that you had intended to leave since it could be reduced and you are not able to release as much equity with this scheme as you could with a reversion plan.
Any financial product you elect to try for your retirement that involves a lifetime equity release is going to have advantages and disadvantages. It is important to decide what will work best for you. For instance, you can request a negative equity clause be added to your contract. This clause can save you and your beneficiaries from paying above the home value at the time it is sold just to pay off the loan and interest that has accrued.
For example, if your home value is £250,000 and you took out £150,000 with an interest rate of 6% for 20 years and your home value reduced to £200,000 you may not have any inheritance left during a sale. However, you would not owe any more than the selling price of the house. It protects against creating a larger problem after someone dies regarding debts.
If the provider you get a drawdown lifetime mortgage from is not regulated by the FCA it can have consequences you may not see right away, because you may not receive a no negative equity guarantee. This means if the sale of your property cannot pay the loan it becomes the problem of the lender and not the homeowner. Without this guarantee that the FCA regulates, you or family members may have to pay off this debt. This can then take away your families inheritance and add an extra financial burden to them. Make sure that the company is FCA regulated to avoid this.
You always want to make certain you look at companies regulated in the UK. You should also consult your family members to ensure they understand the financial package and can help you make a decision. Lastly, speak with an adviser to go over all the negative and positive points of drawdown lifetime mortgage products. A financial adviser will explain the details of lifetime mortgages, outline the different types and speak with you about home reversion as a different option. You can always make a decision on your own after you have varying opinions.
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