What options can borrowers get with drawdown products?

In fact, drawdown lifetime mortgages continue to be the most popular product type, taken out by 56 per cent of new customers in the first half of 2020, according to figures from the Equity Release Council.

Drawdown products enable customers to make phased withdrawals of their property wealth over time – which can be a cost-effective option which limits the overall borrowing costs as interest is only charged as money is drawn.

So who are they suitable for?

Suitability

Will Hale, chief executive at Key, says: “Drawdown products are designed for customers who don’t want to take all of the proceeds of their equity release at once but value having the facility to access more cash at a later date.  

Those who only want to refinance other debts or mortgages may find no need for staged payments or drawdowns.--Steve Wilkie

“Using drawdown means that they only pay interest on the equity they have actually borrowed, which helps to manage the impact of compound interest.”

Currently, there is an almost even split between those who want drawdown products (43 per cent) and those who just want to take out a lump sum (57 per cent).

Steve Wilkie, chairman at Responsible Life, agrees, they suit people who do not need all of the money immediately, but rather, in stages.

He adds: “For example, we see customers release money for their family’s school and education fees, and these will be staged payments. Others want to know that their holiday finances are secure for the next 10 years.

“Those who only want to refinance other debts or mortgages may find no need for staged payments or drawdowns, but many do take the opportunity to set up a facility for an emergency fund or a rainy day.”

They are also suitable for those who need cash flow support, for example, income; those who need to support care, those who want to do some works now and will need additional funds in the future.

The drawdown option can also help people to retain their benefits.

Andrew Morris, senior equity release adviser at Age Partnership, says: “Something we put a lot of emphasis on is making sure people’s benefits are not affected.

If interest rates go up then the rate on future drawdowns will go up and it can be expensive to rebroke unless there has been a death.--Paula Steele

“If, for example, a client is on benefits, normally you would find those benefits are means tested, reduced or lost if the client has more than £10,000 in the bank.

“So having the drawdown facility means this is not classed as their money, therefore they can retain the benefits and just draw down on the actual and reserve facility, as and when they need it, ensuring they do not tip themselves over the maximum limit for benefit testing.”

Being able to only pay interest on what you have taken - so you can set up a facility for use in the future without being charged for it until you need it - means some people might choose to use drawdown as a vehicle for IHT planning for gifting.

Applying caution

But they need to be aware that the fixed rate is the fixed rate at the time of drawdown, and could go up or down depending on the prevailing rate at the point they wish to take out more money.

Paula Steele, director at John Lamb Hill Oldridge, comments: “If  interest rates go up then the rate on future drawdowns will go up and it can be expensive to rebroke unless there has been a death. A fixed rate gives a client certainty.

“From our perspective a drawdown facility is a conventional product, the only difference being that you don’t take the money  all at once, and you save interest while not using the funds.”

Drawdown products can be appropriate for a wide range of customers, but Mr Hale says sometimes loan to value restrictions mean that a customer’s needs do not leave the opportunity to secure an additional facility on top of the lump sum release. 

He adds: “An example could be a customer with a maturing interest-only mortgage who needs the maximum LTV available in order to repay the outstanding balance.”

So, a lump sum product may be better-suited to people that have earmarked their funds for a specific, ‘big ticket’ purchase. 

They may also be a consideration for customers looking to repay an interest only mortgage as they come to the end of their term.

Stephen Lowe, group communications director at Just Group, says: “Larger lump sums are often taken by people seeking ways to restructure or improve their finances, such as clearing a mortgage or refinancing a current lifetime mortgage.

“Bigger borrowers also gift a larger proportion of funds to family, reinforcing the importance of ‘pre-heritance’ estate planning.”

ima.jacksonobot@ft.com