Less is More, When it Comes to a Release of Equity
For many people considering equity release, the thought of a large lump sum can be a very large temptation. However, taking the maximum equity release may not be the most sensible financial decision. Although the lump sum is tax free, there are a number of financial implications to receiving a large sum of money which could create issues in your normal daily life.
Equity Release Schemes in the Past
Before the invention of drawdown mortgages, many older equity release schemes required clients to budget for their requirements for the following five years and take the maximum equity release needed to cover this period. This meant that many people received a large amount of funds which would then be deposited in their bank account or building society savings. This wasn’t particularly the most financially economic decision as the interest rate on even the best savings accounts would be far lower than the interest rate of their lifetime mortgage scheme. Typically this rate would have been seven per cent, so it represented quite a significant loss when comparing the interest received on the savings when compared to the interest being compounded on the scheme.
The Development of Drawdown Mortgages
The conundrum of the older equity release schemes is exactly why drawdown mortgages were developed. This type of scheme allows for clients to take a minimum of £10,000 as a lump sum with the remainder of the maximum equity release to be held in a cash reserve and available for any future withdrawals. This reserve facility allows clients to draw down cash whenever it is required with the possibility of future withdrawals as low as £2,000 per transaction with companies such as Just Retirement and Aviva, or only £1,000 with Hodge Lifetime.
Why it Can Be Beneficial Not to Drawdown the Maximum Equity Release
There are a number of reasons why it can be beneficial not to draw down the maximum equity release. These can include benefit consequences of having over the £10,000 threshold in savings. Many benefits including pension credit can begin to be lost if the person has funds over the £10,000 level.
Additionally, with savings interest rates so low on the high street, it makes little financial sense to draw down the maximum equity release only to have it sat in an account earning very little interest. The facility of the draw down mortgage is to allow convenient future withdrawals without needing to plan well in advance. This can allow a great flexibility in your financial planning which can create a more comfortable retirement.
If you are considering equity release but are concerned about the financial implications of receiving a large lump sum from your maximum equity release, you should discuss your concerns with your equity release advisor. They will assess your circumstances and suitability for products such as a drawdown mortgage. This may provide you with the assurance of not losing benefits or tax credits but with the confidence that you can quickly and effectively draw down additional funds as they are required from your maximum equity release reserve.