Lump sum vs. drawdown lifetime mortgages

What is a lifetime mortgage?

A lifetime mortgage is a loan secured against your home and is a way for homeowners aged 55 or over to unlock some of the value tied up in their home. There are typically no monthly repayments, as the loan, plus roll up interest, is repaid when the plan comes to an end.

But did you know that you can receive your tax-free funds in two different ways? The two forms of lifetime mortgages are a lump sum and drawdown. One is taking all of the money in one go known as a lump sum, and the other allows you to take an initial lump sum and then taken the rest as and when you need it, this is known as a drawdown lifetime mortgage. With our specialist advice, why not let us help you work out the approach that’s most suitable for you and your personal circumstances.

Your lifetime mortgage options

As with any form of equity release, neither options are without their risks and things that you’ll need to think about first. Our advisers are here to make sure you know exactly what’s what if you’re thinking about releasing equity.
 

Lump sum lifetime mortgage

With a lump sum lifetime mortgage, there really is no mystery to it. When you choose to unlock some of the value of your home with a lump sum lifetime mortgage, you’ll receive your funds in one lump sum.

You might have something specific in mind for the tax-free funds you release – such as to repay your existing mortgage or a financial gift to help a loved one out. 

Benefits

• They typically come with a lower interest rate than a drawdown lifetime mortgage, which can help reduce your total cost of borrowing
• Your interest rate is fixed for the life of your plan, whereas any future release with a drawdown lifetime mortgage is subject to the prevailing fixed interest rate at the time 

• As compound interest will be rolled up on what you release, you will owe more if you release all your funds in one go
• You can’t release further funds unless you apply for a further advance – this is subject to the lender’s criteria, your age and your property’s value at the time of application. You would need to take advice for a further advance and fees would apply

Drawdown lifetime mortgage 

If you decide on a drawdown lifetime mortgage, an overall amount you can access is agreed with the lender. You'll receive an initial lump sum of tax free funds, after which you can take more from the amount still available when you next need it (subject to minimum amounts).

It’s often the most practical solution for homeowners who don’t need all the funds in one go. If you require £25,000 for immediate needs but could actually unlock £50,000 from your home, a drawdown lifetime mortgage could be an option for you.

Benefits 

• It offers more freedom than a lump sum plan, allowing you to release money when you need it
• You can potentially save in interest over the lifetime of your plan, as the interest only accrues on the money you’ve released

Potential drawbacks

• Your lender may have the option to withdraw your drawdown facility
• If you choose to make a drawdown, the funds will be subject to the prevailing, fixed interest rate at the time which may be higher or lower than your original interest rate

Why not use our equity release calculator to see what you could unlock?
 

How could a drawdown lifetime mortgage reduce my cost of borrowing?

As you only pay interest on the funds you release, you could potentially save thousands over the course of your plan with a drawdown lifetime mortgage.

Illustrative example
This example is for illustrative purposes only and uses the average release amount of £81,703 and monthly
equivalent rate of 6.74% (future drawdowns will be charged at the prevailing interest rate) – Key Market
Monitor Q1, 2023.

Customer A
Customer A takes all their cash in one go through a lump sum lifetime mortgage, so interest is charged on the full release amount from day one.

Customer B
Customer B takes an initial loan of £51,703, so interest is only charged on this lower release amount. They then make two further £15,000 drawdowns over time, taking their total release to £81,703.

Customer B saves £32,851 in interest charges
While Customer B still borrows the same £81,703 over 15 years, because they take their money in stages, their total cost of borrowing is lower as interest is only charged when they release their funds. As a result, Customer B saves almost £32,851 in interest charges over the total life of their plan. This example is over 15 years but it could be longer or shorter.