Once you have decided a lifetime mortgage is right for you, this is the next real decision, and it makes more difference to the final cost than almost anything else.
It is a simple choice with a big consequence.
The two options, side by side
| Lump sum | Drawdown | |
|---|---|---|
| How you get the money | All of it, at completion | An initial amount now, the rest held in an agreed reserve |
| Interest charged on | The whole amount, from day one | Only what you have actually taken |
| Taking more later | Needs a new application | Draw from the reserve, no set-up cost each time |
| Suits | A known, one-off cost | An income top-up, or a need you cannot size yet |
Why drawdown usually costs less
Interest on a lifetime mortgage compounds. It is charged on the balance, then next year on the larger balance, and so on. So the two things that decide the final figure are how much you borrow and how long it has been sitting there.
Drawdown attacks both. Money left in the reserve is not borrowed, so it is not accruing anything.
Put simply: if you need £20,000 now and might want another £30,000 in seven years, drawing £20,000 now costs you considerably less over time than taking £50,000 today and leaving £30,000 of it in a savings account.
That is the case for drawdown, and for a lot of people it is decisive.
When a lump sum is the better answer
Drawdown is not automatically right, and it would be lazy to pretend otherwise.
You have one clear cost to meet. Clearing an interest only mortgage, paying for the adaptation, settling a debt. If the money is going straight out to a known amount, holding a reserve serves no purpose.
The reserve is not a guarantee. A drawdown facility is agreed with the lender, but the terms of future drawdowns are the lender's, and a facility is not the same as cash in your hand. If certainty matters more to you than efficiency, that is a legitimate reason to take the lump sum.
You want it done. Some people simply do not want a financial arrangement with an open thread on it, and there is nothing wrong with that.
The thing that catches people out
Whichever you choose, there is one number that matters more than this decision: how much you take in total.
Our advice is to borrow only what you need. Drawdown makes that easier to stick to, because you are not sitting on money you have not spent, but a large drawdown taken all at once is no different from a large lump sum.
You can also just pay the interest
Separate from this choice, and worth knowing: modern plans let you pay some or all of the interest, monthly or ad hoc, with no penalty. Pay it in full and the balance does not grow at all. Pay some and it grows more slowly. Do neither and it rolls up.
Combine drawdown with paying some interest and you have the most controlled version of a lifetime mortgage there is.
Not sure how any of this applies to your own circumstances? Craig is happy to talk it through, free and with no obligation.
In short
- Money going out to a known cost: lump sum
- Topping up income, or a need you cannot size yet: drawdown
- Not sure: it is usually drawdown, but it is worth a conversation rather than a guess
- Either way: take what you need, not what you are offered
Which suits you depends on what the money is for, and that is a ten minute conversation rather than a calculator.
Book a call with Craig or call 0113 403 5584.
