Lump sum vs drawdown With a lifetime mortgage, there are two ways you can access your tax-free cash. One is taking all of the money in one go; known as a lump sum, and the other enables you to take it in chunks as and when you need it, following an initial release. This is known as a drawdown lifetime mortgage. How a drawdown lifetime mortgage works
Example of how a drawdown lifetime mortgage could reduce your cost of borrowing Mrs Lewis and Mr Davies both want to release £81,703, but opted to take it out in different ways to meet their requirements.
£81,703 TOTAL BORROWING AMOUNT Lump sum case study
Drawdown case study
A drawdown lifetime mortgage offers more freedom than a lump sum plan, allowing you to release money when you need it. Firstly, you agree an overall sum of money you can borrow. You then take an initial sum and have the option to release further amounts when needed, subject to a minimum release.
Things to consider Your lender may have the option to withdraw the additional borrowing facility and if you choose to make a drawdown, the funds will be subject to the prevailing, fixed interest rate at the time. This new rate may differ from your original interest rate. Benefits of a drawdown lifetime mortgage More flexibility Release funds from your cash reserve as you need it. This gives you the freedom to use as little or as much as you want depending on your circumstances at the time, subject to criteria. Smaller impact on benefits Because you’re in control of when you release the money, you can organise drawing down funds in a way that will help reduce the effect on any means- tested benefits. Less interest to pay Interest only accrues on the funds you draw down once they’re released, so you’ll have less of it to pay. Plus, no interest accumulates while your funds are still sitting in the reserve.
£51,703 INITIAL BORROWING
£15,000 YEAR 10
£15,000 YEAR 5
£81,703 TOTAL BORROWING AMOUNT
Benefits of a lump sum lifetime mortgage Lower interest rates
Lump sum lifetime mortgages sometimes come with a lower rate of interest compared to a drawdown lifetime mortgage. Interest rates don’t change When you release further funds from your drawdown lifetime mortgage, the money released is subject to the prevailing interest rate at the time. With a lump sum lifetime mortgage, however, your interest rate is fixed for the entirety of your plan. Taking all your available cash in one go will limit your future borrowing options. As interest accrues on the full amount taken from day one, the amount you owe will increase faster.
Mrs Lewis Mrs Lewis decided to take out all her money in one go through a lump sum lifetime mortgage. As interest is charged on the full release amount from day one the total cost of borrowing after 15 years could be £223,915 (based on a monthly rate of 6.74%) on her loan of £81,703.
Mr Davies Mr Davies decided to take out an initial loan of £51,703 to meet his immediate requirements, then make two further £15,000 drawdowns over time (year 5 and 10). As he took out his money in stages, his total cost of borrowing was lower as interest is only charged when the funds were released.
Total cost of borrowing after 15 years £223,915
Total cost of borrowing after 15 years £191,064
Over the same 15-year period, borrowing the same amount of money, Mr Davies saved almost £32,851 in interest charges compared to Mrs Lewis.
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.
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