How does drawdown lower the cost of equity release?

Why choosing a drawdown lifetime mortgage could make equity release cheaper

Written in line with our editorial policy.

Equity release lets homeowners aged 55+ unlock some of their property wealth to help fund retirement or other financial goals. But did you know that taking your money in stages rather than a lump sum can reduce the overall cost? 

In this article, we’re going to look at how a drawdown plan can reduce the amount of interest you pay compared to a lump sum arrangement. That has the potential to cut the cost of equity release by thousands of pounds.

What is a drawdown lifetime mortgage?

A lifetime mortgage allows you to access tax-free cash from your home’s value without having to sell it or make any mandatory monthly repayments. Instead, the interest accumulates, and the loan and interest is repaid when the property is sold, either after you pass away or when you move into long-term care.

A drawdown lifetime mortgage is a type of plan that lets you withdraw funds from your plan gradually, rather than taking a single lump sum upfront. 

With a lump sum option, you receive the entire amount at once, which can be ideal if you need a large initial payout. However, with drawdown, you only take what you need, when you need it. This can reduce the equity release interest owed over time, making it more cost-effective for some borrowers.

Why drawdown can be more cost-effective

A lifetime mortgage involves compound interest building up on the loan. Starting with a smaller initial withdrawal can make a real difference in cost over the long term. 

With drawdown, you take an initial amount at the start of your plan, leaving the remaining funds available in your ‘reserve’ pot for later use. Interest only accrues on the funds you actually withdraw from your reserve. 

By taking smaller amounts as needed, you reduce how much is owed in the long run. This approach can keep the total interest more manageable, especially if you only need occasional access to smaller amounts over time.

A key benefit of this is that it can reduce the impact that equity release has on the inheritance you leave from your property wealth. If less accrued interest needs to be paid along with the loan itself, more money from the sale of your home will typically be available for your beneficiaries.

How interest applies to drawdown schemes

Drawdown interest rates are based on the rate applicable when you make each withdrawal. For example, if you’ve been approved for a total of £100,000 and take out £20,000 to begin with, interest only accrues on that £20,000 at the rate your provider offers you.

Say you release a further £4,000 a few years later, then you will start to pay interest on that amount too. However, this could be at a higher or lower rate depending on what is available at that time. It means you could have several interest rates applying to your different loan amounts. 

As you are effectively postponing interest being applied to some of your loan, this can result in significantly less interest compared to a lump sum plan, where interest is charged on the full amount from day one. 

You could potentially minimise interest further by keeping an eye on the ups and downs of equity release interest rates and make future withdrawals when rates are lower than today. (However, no-one can accurately say when or if rates will come down, so you should bear this in mind.)

Who might benefit most from a drawdown lifetime mortgage?

A drawdown lifetime mortgage can be a good choice for homeowners who want to access a smaller amount initially, rather than take a larger lump sum all at once. This could be to minimise interest in the long term, or simply to have that cash safety net available should you need more cash one day.

You might want a smaller cash boost for now to supplement retirement income, book a holiday, top up your monthly income, or fund occasional home improvements. A drawdown approach could meet your needs while keeping interest costs lower in the long run. 

If you’re unsure of how much you’ll need in the future, a drawdown lifetime mortgage can also provide flexibility, allowing you to withdraw only what you require without committing to a large sum upfront.

Finally, for some people a drawdown plan will be attractive because it can mean more of your property’s value will be available to leave as an inheritance, compared to a lump sum plan.

Things to consider before choosing a drawdown lifetime mortgage

While drawdown lifetime mortgages can offer flexibility and cost savings, there are still pros and cons to weigh up. 

For example, when you arrange your plan, your provider will stipulate the minimum amount you can unlock each time you return to withdraw funds from your cash facility. This amount varies between providers. 

For example, Legal and General requires a minimum withdrawal amount of just £1,000 each time you return after taking your initial lump sum, whilst Canada Life requires customers to take a minimum of £2,000 at each subsequent withdrawal. 

Another point to consider is that some providers may charge you a higher interest rate to arrange a plan with a cash facility to dip into when needed. This means that the interest rate applicable to your initial advance and any subsequent borrowing will be higher than if you were to simply unlock a single lump sum. 

That said, if you intend to unlock smaller amounts over several years, you may still incur less compound interest over the life of your plan. 

Our selected equity release advisers can explain all of this to you and compare different plans. They will help you find an option that best suits your current and future financial goals.

See also our dedicated pages on lump sum lifetime mortgages, drawdown lifetime mortgages and the pros and cons of equity release.

Is drawdown right for your financial goals?

If you’re wondering whether drawdown is the right option for you, please do reach out to our selected advisers. They can help answer your questions, check your eligibility and explore how a drawdown scheme could align with your financial goals and long-term needs. 

To explore equity release and discuss your options, contact our friendly team at 0808 178 3055 or request a call back.

Not quite ready to speak to someone yet? You can get an estimate of how much you could unlock from your home.

About Clare Yates. With over a decade’s experience writing about later life financial planning, Clare offers a wealth of knowledge about equity release, pension annuities, wills, LPAs and more. When she isn’t writing, Clare likes to spend her time baking and going on walks with her husband, two children and their rescue dog. Follow Clare on LinkedIn