For people who have money tied up in their homes who wish to release capital for expenditure, or possibly to give to family members, the drawdown lifetime mortgage (DLM) is a possible vehicle.
A DLM is simply a mortgage, but one which is drawn down over time. For example, a person whose home is valued at £500,000 may get agreement that a drawdown of £125,000 will be supplied. There is no need to take the sum at once and interest is only payable on the amount actually drawn down. In practice, sums are taken piecemeal. The advantage of such a scheme is that the savings in interest payable can be considerable compared with taking the whole sum ‘up front’. Also, it is not uncommon for people who release a large sum all at once to spend it more quickly than they had anticipated.
One other advantage of DLMs is that the property remains yours so any future growth in value belongs entirely to you. This can be very useful, particularly if you intend to ‘downsize’ at a later date. In such circumstances the loan can usually be readily transferred to the new property. Also, most drawdown plans carry a guarantee that should the value of your property fall to the extent that the loan plus interest and charges exceeds the value of your house, your right to remain in your home is preserved.
If you wish to take out a DLM and someone else lives with you in your property, it will be necessary to get them to sign a waiver confirming that they have no right to remain in the property if you die or move into a long-term care home. Should it become necessary for you to have care provided in your own home, the way contributions to the cost of the care are calculated means that the value of your home and mortgage are ignored. Where care at home is necessary, if you have a large lump sum, then that money will be taken into account when assessing your contribution to the care costs. This may in effect mean that the capital is lost over time. However, with a DLM the authorities cannot require you to draw down the rest of the available drawdown facility, which can assist in the preservation of family capital.
“If you are considering obtaining a DLM, as with all such financial products there are pros and cons which should be taken into account,” says Mohinder Chima. “There may be ramifications for your Income Tax and Inheritance Tax positions and there may also be an effect on the division of your estate. For all these reasons, professional advice should always be taken at an early stage when considering such action.” |
