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Understanding equity release: Lump sum vs drawdown – an explanation

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Equity release allows you to access some of the tax-free cash tied up in your home. 
 
Lifetime mortgages, the most popular form of equity release, make up more than 99% of the market.
 
The other type of equity release is a home reversion plan, where you sell all or part of your home to a reversion company. But a lifetime mortgage lets you retain full ownership of your property. It’s just a loan secured against it. 
 

Lifetime mortgages explained

 
With a lifetime mortgage, as well as the benefit of remaining the owner of your home, there’s also a large amount of flexibility, meaning you can find a plan that best suits you. 
 
For example, although there are typically no monthly repayments with a lifetime mortgage, if you want to make some to reduce the overall cost of your equity release plan, you can with some plans. This could be done either on an ad hoc basis or a regular one.
 
Equity release plans are also flexible on how you receive your tax-free cash. With a lifetime mortgage, you have two options. 
 

Lump sum

 
This is where you can take all of your cash in one go. A lump sum is great if you have already planned everything you want to do with your money. However, if you haven’t, a drawdown may be more suitable. 
 

Drawdown

 
With a drawdown, following your initial release you can decide when to withdraw all or some of your remaining funds. It means that you have extra money tucked away – but only should you decide you need it. It might be for making home and garden improvements, futureproofing or gifting a living inheritance. 
 
One additional advantage of a drawdown is that you only pay the compound interest on the cash you actually release. So, if you are able to take £86,000 from your property but only want £40,000 initially, you can store the remaining £46,000 for another day and only pay interest on the initial release. Be aware, though, not all drawdown funds are guaranteed. 
 

Choosing the right option

 
More than two thirds of our customers in 2018 chose to take advantage of the drawdown facility available through a lifetime mortgage1. Mr Walker was one of them.
 
“We particularly liked the idea of an initial withdrawal amount with the option of a drawdown of further funds if necessary, and the fact that we don't have to make any monthly payments,” he told us.
 
“For us, it was the perfect solution.” 
 

Find out more

 
Why not see how much you could release using our free online calculator?
 
Or, if you’d like to know more about equity release, you can download our free guide here
 

What should you consider before taking out equity release?

Our independent, specialist equity release advisers compare products from the whole of the market to find the most suitable equity release plan for you. They’ll discuss all the options available to you and explain that taking an equity release plan reduces the value of your estate and may affect any means-tested benefits you’re eligible for.
 
With a lifetime mortgage, you’ll still own your home. It’s a loan secured against your home and is repaid when you, or the last surviving applicant, pass away or move into long-term care. 
 
Equity release plans we recommend have a no negative equity guarantee, which means you’ll never owe more than the value of your home.
 
You have to get expert advice before releasing equity; it’s a regulatory requirement. Key’s initial consultation is free with no obligation to proceed. If you decide to go ahead with an equity release plan, our advice fee – usually 1.99% of the amount released, subject to a minimum of £1,499 – is payable only on completion.
 
1Key’s FY Market Monitor 2018 Data
 

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