How a drawdown equity release plan could give you a regular income
Homeowners aged 55 and over who are looking to supplement their finances as they approach, or are already enjoying, retirement have the option of unlocking tax-free cash from their home with equity release.
You may be able to unlock from a minimum of £10,000 up to a percentage of the value of your property – providing it is worth at least £70,000.
The exact amount of money that you can access is based on the age of the youngest homeowner and the value of your home.
Equity release options
Equity release can be a flexible option with many options available depending on your individual needs.
There are two main types of equity release: a home reversion plan or a lifetime mortgage.
With a home reversion plan you sell some or all your property but have the right to continue to live there rent-free for the rest of your life.
By far the most popular type of equity release plan is a lifetime mortgage, which is where you borrow money secured against your property but continue to own 100 per cent of it until you die or go into long-term care.
At that point, any money released, plus accrued interest would be repaid.
With this option, you can also choose to take the tax-free cash in one lump sum, or in smaller amounts over time.
There are pros and cons to both, and the options below are relevant for those considering lifetime mortgages.
Benefit from a regular income with a drawdown
A drawdown plan, also known as a reserve facility plan, is where you don’t take all the money you release in one go. Instead, you take out or ‘draw down’ the funds as and when you need them.
The main benefit of this is that interest is not charged on money that has not yet been drawn down.
Typically, there aren’t any extra fees to do this, and you simply have to contact the lender and tell them the amount you require.
Retirement specialists Age Partnership have seen an increase in homeowners choosing this type of plan recently.
In 2022, 36% of its customers chose a drawdown, but in 2023 that rose to 39%.
What are the pros and cons of drawdown?
With a drawdown plan the interest rate could change, depending on when you decide to take out money. This can be either positive or negative, depending on what happens to rates.
If interest rates increased, you would have to pay more interest on funds withdrawn in future than you did when you first took the plan.
But if interest rates went down, then future funds could be taken out more cheaply.
It is important to think about what you are likely to use the money for.
Drawdown plans can provide an ongoing source of income, which could be useful if you plan to spend it on things like annual holidays, home improvements that are happening in stages or regular gifts to family.
What is a lump sum equity release plan?
With a lump, you decide the total amount of equity you want to take, and that amount is in your bank account to spend when you wish.
The interest rate will be fixed at the time that you take out the plan, and interest will accrue on the entire amount borrowed from the outset.
The rate agreed at the outset won’t change, which means you know exactly how much interest you will owe. That could be positive or negative depending on the direction of interest rates.
The exception is if you have a plan review and decide to switch your equity release plan for a better rate.
However, being able to do this will depend upon whether you qualify for the latest plan developments, the amount outstanding on your equity release plan including interest that has accrued and any potential early repayment charges that may be applicable.
Is equity release right for me?
One of the main benefits of equity release for many people is you’re not required to make any repayments if you don’t wish to, as the money you unlock, plus accrued interest, is only repaid when you die or move into long-term care.
Equity release requires paying off any existing mortgage, but once you have repaid this using the funds you release, the money is yours to enjoy spending.
It’s a requirement to get advice before proceeding with equity release.
An advisor such as Age Partnership, who is a member of the Equity Release Council, will take you through all your options with a no-obligation quotation to ensure it is the right decision for your individual circumstances.
It could be that downsizing, speaking to family, or taking in a lodger could be a more suitable way to raise funds.
Equity release may involve a home reversion plan or a lifetime mortgage, which is secured against your property and will reduce the value of your estate and impact funding long-term care.
Through Age Partnership, initial advice is provided for free and without obligation.
Only if your case is completed would an advice fee of £1,895 be payable. Other lender and solicitor fees may apply.
Age Partnership is a trading name of Age Partnership Limited, which is authorised and regulated by the Financial Conduct Authority. FCA registered number 425432. Company registered in England and Wales No. 5265969. VAT registration number 162 9355 92. Registered address, 2200 Century Way, Thorpe Park, Leeds, LS15 8ZB.