Lump sum vs drawdown lifetime mortgages

Is a lump sum or drawdown scheme the best fit for your financial needs?

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Lifetime mortgages allow homeowners aged 55+ to access some of your home’s value without having to sell or move. The two main options – lump sum and drawdown – each offer pros and cons.

A lump sum lifetime mortgage gives you a one-time, typically larger withdrawal from your property’s value. This can be ideal for covering substantial up-front costs, such as clearing your existing mortgage, making expensive home renovations or helping your family financially. 

A drawdown lifetime mortgage allows more flexibility by letting you access smaller amounts over time. This could be ideal for smaller financial goals such as topping up your income, upgrading your car when you need to, or paying for holidays. After your initial withdrawal, you can take further funds from a pre-agreed reserve facility when you need to.

Key differences between lump sum and drawdown options

Here’s a quick comparison of these two different types of plans:

• Accessing your funds. Lump sum plans provide all of your tax-free cash at once, while drawdown offers withdrawals from a cash facility, taken as and when needed.
• Interest accumulation. With a lump sum plan, interest accrues on the entire amount immediately. With a drawdown plan, interest is only applied as and when you withdraw cash from your reserve, typically lowering the overall interest costs.
• Repayment options. Both schemes typically come to an end through the sale of your home when you pass away or move into long-term care. Some plans allow you to make optional partial repayments to repay a percentage – typically up to 10% of the loan each year – without penalty. Interest-only options are also available which allow you to service all or some of the interest each month.
• Interest rates. Lump sum mortgages have a single fixed-for-life interest rate. The interest rate on drawdown plans differs for each withdrawal, depending on the current rate.

Cost comparison: how interest adds up

With a lump sum plan, interest accumulates on the full amount from day one. Lump sum plans often come with a fixed interest rate for life, so you know the cost of borrowing from the start and can see exactly how much you’ll owe in the future. Our compound interest calculator shows you how this works.

In contrast, drawdown schemes allow you to take only what you need over time, so you only pay interest on those amounts, helping to manage overall costs. This staged withdrawal can reduce compounding interest significantly, making it a more cost-effective option for those not needing a large up-front sum. For this reason, it is a little more difficult to predict the overall size of the interest due in the future with a drawdown scheme. 

Additionally, interest rates apply to each withdrawal individually, which can vary over time. So, if you release an initial sum at one rate and later withdraw additional funds, each withdrawal could be subject to a different rate. This means you could have multiple rates affecting different parts of your loan, making it more tricky to predict the total amount owed in the future. This may of course be offset by the potentially lower overall cost of a drawdown plan.

When a lump sum lifetime mortgage might be best

A lump sum plan may suit those needing immediate, larger funding for expenses like home renovations, clearing an existing mortgage, a deposit on a new home or a large one-off purchase. In these cases, accessing your available funds all at once may be necessary to achieve all of the financial goals you have in mind.

When a drawdown lifetime mortgage might be best

A drawdown lifetime mortgage offers flexibility, potentially ideal for those who anticipate smaller, ongoing expenses or prefer to manage interest costs. The option to make withdrawals as and when needed helps to avoid paying interest on unnecessary funds. 

Impact on inheritance and estate planning

Both types of lifetime mortgages will reduce the value of your estate and the amount of inheritance you leave for your heirs.

The difference is that lump sum plans typically reduce your equity more significantly from the start and the interest can accrue more quickly, affecting potential inheritance. 

Drawdown mortgages may make equity release less expensive overall, depending on how much you eventually withdraw and the interest rates applicable for each withdrawal amount.

If the issue of leaving an inheritance is important to you, many lump sum AND drawdown schemes also offer inheritance protection options. These allow you to ring fence a percentage of your home to leave as an inheritance for your loved ones. 

Am I eligible for a lump sum or drawdown scheme?

Eligibility for both types of lifetime mortgages is generally similar, typically requiring the following:

• You must be at least 55 years old and a UK resident. 
• When a couple applies, the youngest applicant on the deeds of the property must be 55 or above.
• You must own your own home in the UK, and it should typically have a value of £70,000 or more.

Lump sum vs drawdown: summary table

To sum up, here’s a quick comparison of the two options to help you see the main differences at a glance:

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

Choosing the right option

Deciding between a lump sum and a drawdown lifetime mortgage depends on your financial goals and lifestyle needs. If you’re 55+ and ready to explore which option aligns best with your plans, do get in touch to discuss your situation with one of our selected advisers.

Contact us on 0808 178 3055 to talk to one of our selected equity release advisers, or request a call back here.

Not quite ready to speak to someone yet? A great starting point is getting an online 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