A few years ago, the National Lottery operators published results of a survey conducted among a very select group of people, major Lotto winners, after asking them what their first post-win purchase had been.
Answers, as you may imagine, varied considerably. Some people had splashed out on a fancy car; others booked a round-the-world cruise, while a smaller number embarked on a seemingly perpetual shopping trip.
But not everyone; some winners were surprisingly prudent as they dealt with the scale of their success, which perhaps explains why the operators found that the most common item heading Lottery winners’ shopping list was a humble washing machine.
This revelation may at first be difficult to comprehend. Put yourself in the winners’ shoes: you’ve just scooped say, £50 million plus, you could still be in a state of shock and the first thing you’re interested in is the length of wash times on a device which around 90% of UK households already own. It’s not exactly living the rock ‘n roll lifestyle, is it? Nor, however, is it odd.
I suspect that most sudden, multi-millionaire winners are so overwhelmed by the magnitude of their success that they’re content, initially at least, to concentrate upon the mundane. Unless you know exactly where or what you want to do with a significant windfall, being presented with a large sum of money can be overwhelming, even problematic. Where to put it; invest it; what to buy with it, for example.
This monetary dilemma perhaps explains why many major lottery winners eventually decide to take their colossal jackpot as a regular monthly amount rather than a lump sum, content in the knowledge that if a larger amount is required to fund a particular acquisition, it’s available.
Over the last decade, a similar trend has become increasingly apparent within the equity release market as homeowners have embraced a newer, more flexible product which enables them to access a tax-free, cash reserve facility. In short, drawdown lifetime mortgages offer older homeowners the opportunity to release funds from their property when they want.
According to the Equity Release Council (ERC), in 2022, the last full year for which figures are available, nearly half (48%) of new equity release customers nationwide took out a drawdown lifetime mortgage, accessing a first instalment of £82,643. It might not be a lottery win, though nor is it intended to be, but it’s certainly a manageable sum.
“The most recent ERC figures come as no surprise,” says Mark Gregory, founder and chief executive of Equity Release Supermarket. “For an increasing number of clients, the great appeal of a drawdown lifetime mortgage is its inherent flexibility. Lots of people do not necessarily need the total amount they could release from their property in a single lump sum. Accordingly, the drawdown lifetime mortgage is popular because it gives folks the freedom to release funds, on a regular, or even irregular, basis,” adds Mr Gregory.
The process by which homeowners aged 55 and above can obtain a drawdown lifetime mortgage is not dissimilar to an application for a standard equity release lifetime mortgage. Following a consultation with a qualified adviser, the amount a homeowner may withdraw from the wealth built up within their home is established based upon the applicants’ age, health and their property’s value. It’s at this point that under the terms of a drawdown lifetime mortgage, the homeowner can withdraw an initial, tax-free lump sum safe in the knowledge that a balance is held as a cash reserve, available to draw down whenever it’s required.
This completely flexible arrangement ensures the homeowner(s) may withdraw further funds, subject to minimum amounts, at any time without incurring arrangement or administration fees. The interest rate applicable on the extra amount drawn down will be the prevailing rate at that time. Hence, your annual equity release statement from your lender will highlight the different tranches with their corresponding interest rates.
Moreover, interest is only charged on funds drawn down by the homeowner, not on the total amount agreed following the initial application process. This feature could have beneficial longer-term consequences: as there is effectively less interest to pay, there could be more money bequeathed to beneficiaries when the homeowner(s) dies.
Furthermore, homeowners benefit from not having to make any monthly payments should they prefer. As is the case with ‘standard’ equity release, the drawdown lifetime mortgage, plus accrued interest, is repaid when the homeowner(s) die or move into permanent residential care.
“For many homeowners, one of the fundamental advantages of having a drawdown lifetime mortgage is the fact that interest does not accumulate as quickly as it can under ‘standard’ equity release terms,” notes Mark Gregory. “Interest is only payable on the amount of money drawn down from the agreed cash reserve, not on the total sum,” he adds.
Lower interest charges are only one of the benefits of a drawdown lifetime mortgage. Home ownership is not compromised: homeowners continue to retain 100% ownership of their property, which ensures they can benefit from future appreciation in its value. It’s also worth noting that by arranging their affairs to withdraw smaller amounts from the tax-free cash reserve, homeowners can reduce the impact on means-tested state benefits to which they may be entitled.
The drawdown lifetime mortgage might be a bit of a mouthful, but it is justifiably described as ‘equity release with added flexibility’. While homeowners opting for a drawdown facility retain benefits such as the valuable promise of ‘no negative equity guarantee’, they also acquire a slightly more esoteric advantage: peace of mind. Should additional funds be needed at some future date – and there’s no need to determine when that might be – homeowners know they can call upon them at very short notice. In some instances, it’s possible that homeowners may not need to withdraw the full amount of tax-free funds for which they have been approved.
