Should you consider a drawdown equity release plan?

Homeowners who want to borrow against their home are choosing more flexible equity release products, according to the latest figures from the Equity Release Council (ERC).

While the overall number of people using equity release is falling, new customers are increasingly opting for drawdown lifetime mortgages, a type of equity release that lets you make several withdrawals rather than taking one lump sum.

Here, Which? explains how ‘drawdown’ equity release plans work, why they are becoming more popular and if there are any other issues to consider.

How do drawdown lifetime mortgages work?

A lifetime mortgage is the most popular type of equity release. They allow you to take out a loan against your property, which is repaid from the proceeds when it is sold – this is either when the last borrower dies or if they move into long-term care.

It's often assumed that you can only make a one-off lump sum withdrawal with a lifetime mortgage, but this isn’t the only option. It may make more sense to make several smaller withdrawals, or ‘draw down’ the funds, over a longer period.

This can be achieved if you take out a drawdown lifetime mortgage, which provides a cash reserve facility. It allows you to release your cash over time when you need it.

• Find out more: what is equity release?

Why are drawdown plans becoming popular?

Drawdown lifetime mortgages recorded the highest share of new customers in the first three months of 2024, for more than two years. Some 56% of new customers opted for a drawdown product in the last quarter compared with 45% in Q2 2022.

With interest only payable on the cash you have taken, these plans can prove more cost-effective. That's because the debt will be smaller as interest is only charged on the released funds – reducing the impact of compounding.

New drawdown customers typically agree to slightly larger loans than lump sum equity release customers, averaging £114,911 compared to £103,492 in the first three months of 2024.

However, with £59,660 taken upfront on average, the flexible drawdown facility makes it possible to benefit from future rate cuts by holding the remainder back for use in subsequent years, as each withdrawal is charged at the prevailing rate at the time.

Of course, if interest rates go up, customers could have to pay more interest on funds withdrawn in future than they did at the outset of the plan.

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Why are new equity release customer numbers falling?

The number of homeowners using equity release to borrow against their homes is falling.

There were 4,698 new equity release customers between January and March 2024, a drop of 11% compared to three months before and 31% lower than in the same quarter last year.

A total of £504m was borrowed between January and March 2024, a dip of 6% from the £535m borrowed in the three months before.

David Burrowes, Chair of the Equity Release Council, commented: 'The Q1 2024 data highlights the ongoing challenges facing the residential property market in the UK as the nation waits to see what happens next with interest rates and the health of the economy.

‘New customer numbers are lower than last year with feedback from the market suggesting that older homeowners are adopting a more cautious approach to borrowing as there are hopes of interest rate reductions in the near future’.

What to consider before using equity release

Equity release can appear attractive, especially if you lack other borrowing options. But it's an expensive, lifetime commitment that's not right for everyone, so there are some key considerations.

The amount you can borrow depends on your age and how much your home is worth. You'll need to be at least 55, but the older you are, the more you can borrow. The maximum you can borrow is around 60%.

Arranging equity release can prove useful if you have value tied up in your property but are worried about having enough to live on in retirement or to cover care costs. The money could also be used for home improvements or helping out relatives. With equity release, there is no obligation to make any repayments, although some products allow you to do so.

Equity release does carry some potential downsides. Not making any repayments on your loan will mean you end up paying far more than you’ve borrowed due to the compounding of interest. This could mean the value of your property is wiped out entirely.

It is essential to discuss taking out equity release with your family first. Using equity release will often reduce the size of your estate and the amount you can leave behind for loved ones as the lender is repaid before the rest is divided among beneficiaries.

• Find out more: the pros and cons of equity release

How to arrange equity release

You'll need to obtain regulated advice from a qualified equity release adviser as part of the arrangement process. This is a requirement of the Financial Conduct Authority.

Companies selling equity release must, therefore, offer advice. The Equity Release Council has a directory of financial advisers with equity release experience. 

Your chosen adviser should be a specialist in equity release and hold one of the following approved qualifications:

• CeRER (Certificate in Regulated Equity Release) – awarded by the Institute of Financial Services (IFS).
• CER (Certificate in Equity Release) – awarded by the Chartered Insurance Institute (CII).
• ERMAPC (Equity Release Mortgage Advice & Practice Certificate) – awarded by the Chartered Institute of Bankers in Scotland. The ERMAPC was discontinued a few years ago but may still be held by some advisers.

An adviser who isn't restricted to recommending products from just one or two firms is the preferable option.

Brokers of equity release products such as HUB Financial Solutions, Age Partnership and Key Later Life Finance can look across the whole of the market to find the product that meets your specific requirements. 

• Find out more: how much will you need to retire?

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Other financial services:

Mortgage service provided by London & Country Mortgages (L&C), Unit 26 (2.06), Newark Works, 2 Foundry Lane, Bath BA2 3GZ. London & Country are authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

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