Draw-down equity release plans provide you with the cash that you need now and provide you with ongoing funds in the future too. The money for the future is held in a pre-agreed reserve facility. You can think of this facility a little like a savings pot which you can draw upon as and when you need it. Importantly you will not be charged interest on the money held in reserve.
In this guide, you will learn:
With a draw-down equity release plan, you release an initial amount of money now, and then have access to further money in the future.
The minimum amount that you must take up-front is usually £10,000, and the amount that you can have in reserve is often up to the maximum available to you.
With most lifetime mortgages, the minimum amount you can draw upon in the future is £2,000 at a time.
As you can see, lifetime mortgages with reserve facilities can be a great way to provide you with future income top-ups as and when you need it.
It will not be surprising that on this basis, nearly half of the plans that I recommend come with a reserve facility.
Let's look at an example of a draw-down equity release plan:
Jane knows that she needs £20,000 now to repay her existing interest-only mortgage.
Jane would like to stay in her property later in life but thinks that she would like a new bathroom and kitchen in five years. She may also need a new boiler too.
Initially, Jane thought about taking out £70,000 to cover these expenses, but I recommended otherwise.
I recommended a lifetime mortgage providing an initial lump sum of £20,000, with a reserve facility of £50,000 for use later. Jane benefits from a 4% rate of interest on the money she needs now. However, she isn't stuck paying interest on the money needed in the future while it sits in her bank account not ready to be spent.
If Jane took £70,000 now at 4% interest, the amount owed would grow to £85,166 after five years (£15,166 in interest).
By taking £20,000 now, the amount owed after five years is only £24,333 (£4,333 in interest).
In this example, the reserve facility acts a bit like a savings account, whereby she can access the money as she needs it in the future without having to pay interest now.
By only taking the money she needs now Jane saves £10,833 in interest in the first five years.
As you can see, the difference can be massive!
All lifetime mortgage lenders offer draw-down equity release plans. These include some mainstream lenders you may have heard of, including Aviva, LV and Canada Life. And also some specialist equity release lenders such as More2Life and Pure Retirement.
Different lenders structure their draw-down lifetime mortgages in different ways. For example, most lenders set the reserve facility in tiers. In contrast, Aviva requires you to set the amount you wish to have in reserve explicitly.
In all instances, you will only incur interest on money that you have physically released, not directly on cash held in reserve.
Having a lifetime mortgage with a reserve facility can be a great way for you to save thousands of pounds over the lifetime of your plan.
The quick answer is that it should cost you less to have a draw-down plan than a lump-sum lifetime mortgage if you are not looking to spend the money all at once.
The big difference with a draw-down lifetime mortgage is that any monies that you have in reserve do not attract interest. Just like lump-sum plans, interest is only charged on cash that you have released.
Lifetime mortgages with a reserve facility will often come at a slight premium; We frequently see these plans incur an additional 0.2% charged on the initial borrowing.
For all lifetime mortgages, any future draw-downs are charged at the prevailing rate at the time of the draw-down request.
It is for this reason that I recommend that you take enough money initially to last you for the next 2-3 years. That way, you are able to secure the funds now, at a known rate of interest. Any money that you require after this could be put into reserve.
If there is money that you are speculatively looking to spend after ten years, I would usually recommend not placing it into a reserve facility. Instead, at the point of requiring the funds, you could take a further advance on your current plan, or switch to a new one. This is because if you are unlikely to draw upon the funds, then you should not put them in reserve unless it does not cost you any more to do so.
It could be that interest rates increase and at the time you require additional funds, you are charged a higher interest rate. If you are concerned about this fact, then I strongly urge you to discuss this with your equity release advisor.
Any advisor should be able to demonstrate how much you could pay by having a higher interest rate on additional borrowing. From this, you should make an informed decision on the best course of action for you to take.
You may find that lump-sum products could provide you with a higher total release amount; however, this is not always the case.
In theory, the amount you can have in reserve is anything up to the maximum available to you.
Most draw-down equity release plans are uncapped, meaning that you can hold any unreleased money in reserve. However, some plans will only allow you to keep a percentage in reserve depending on the amount you initially released. This could typically be between 50% and 150% of the amount that you initially released.
So why would you not just put the maximum in reserve?
This is something that I often get asked. The reason is that the lender will charge you more for the initial amount of money you have released. It could even be that your interest rate doubles by putting the maximum available in reserve.
One of the great things about a reserve facility is the ease of access to future cash.
To access the money, you can contact your lender, and they will send you an offer document outlining the money they are offering you, and on what terms.
The document will usually be in a similar format to the original borrowing documents which you received before your plan started.
If you are happy to proceed you sign the acceptance form, return it to the lender, and they deposit the cash straight into your bank account.
You will not be required to have an additional property inspection, nor will you be required to have further financial or legal advice. For this reason, we usually expect future withdrawals to be much quicker than initial borrowing (often within a couple of weeks).
Even though you can contact your lender directly, I always encourage my clients to speak with me again. This is because there may be new plans which are better suited to their needs. We do not charge for this service, so if you have an existing lifetime mortgage and are considering making a withdrawal of funds, why not contact me for an impartial review.
The good news is that even if you do not have a remaining reserve facility, you could still access additional funds. With a reserve facility, the amount available is pre-agreed, but it does not mean that it is the only amount that is available.
You will require further financial advice from an equity release advisor. But this could be an advantage!
When I am advising someone who requires additional funds, I will always consider taking a further advance with your existing lifetime mortgage lender, and whether to arrange an alternative plan.
Once you have exhausted a reserve facility, it is not possible to add one without moving to an alternative plan. But by moving to a different plan, you could always add a reserve facility again to aid with future withdrawals.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.