The growing trend towards ‘drawdown’ mortgages

Equity release products have continued to develop in recent times, not only in line with industry developments but also to recognise people’s evolving needs and wants in retirement.

Increasing life expectancy, together with underfunding and other widely reported issues with pension schemes, means a growing number of people will have to utilise more of their assets to ensure a comfortable retirement. People can expect to be more active in their retirement and they are likely to have extra time to enjoy the activities they always enjoyed before. Having access to a little extra money can make all the difference to them and help them maintain their pre-retirement lifestyle.

There is now an increasing number of providers of equity release plans, including some very well known names and more recently, the plans offered have become much more flexible, allowing amounts to be drawn down as and when required rather than as one lump sum at the start of the plan. As the market has increased in diversity, with more competition and product choice, intermediaries and borrowers have begun to realise the opportunities and benefits within this market sector. The addition of flexibility has opened up the market to a whole new audience.

An attractive proposition?

Over the past year, interest rates have fallen dramatically, making lifetime mortgages a much more attractive proposition for many people. Using a flexible drawdown type of lifetime mortgage can save clients thousands of pounds when compared with less flexible types of mortgage that have been the main choice until recently. This is because only the amount that has actually been drawn down accrues interest, thus ensuring the total amount of interest paid over time is kept to a minimum.

These lifetime mortgage products usually offer smaller initial lump sums and small minimum drawdown amounts, enabling the client to take as little as they wish at the start and supplement it as they go. This significantly reduces the interest charged and can therefore increase the proportion of the property value remaining for the client.

For example, a client thinking of using an equity release plan to make their retirement plans more comfortable may wish to take a nice holiday once or twice a year and to be able to replace their car every couple of years as well.

Showing the benefits

If they were to take a lump sum of £54,000 through an equity release plan at 65 years old, by the time they reach 85, the debt outstanding will be over £174,000 at an interest rate of 6 per cent fixed.

Drawing smaller amounts of £5,400 a year for 10 years instead, to give a total of £54,000 and still meeting their aspirations for retirement, the debt outstanding at age 85 would be less than £137,000 – a saving of around £37,000. Even offsetting any savings remaining in a deposit account from the one-off lump sum would still leave an advantage of several thousand pounds to the drawdown route. Drawdown mortgages represent a fantastic opportunity for brokers looking to expand their activities and for borrowers looking for a way of freeing up funds while retaining a balanced comfortable retirement. The flexibility of drawdown means it is a sector that should not be ignored.