Some plans could leave you out of pocket

Equity release schemes are being tipped as the "next big thing" in financial services, and are mostly aimed at people aged 65 and over.

Retired homeowners are estimated to be sitting on property worth �700bn.

The plans are marketed as ideal for people who have paid off their mortgage, as they allow owners to release cash tied up in their home without having to sell up.

But the Consumers' Association said there were big flaws with some of the plans, which could be punitive, complicated and expensive.

Unlocking cash

There are two main types of equity release plans: Interest roll-up loans and home reversion plans.

We advice people considering equity release schemes to view them as a last resort Helen Parker, editor of Which?

An interest roll-up loan lets people borrow money against the value of their home and, in most cases, receive a lump sum.

Unlike a normal mortgage or loan, interest is added to the loan, rather than repaid while living in the property.

The amount owed can grow quickly as interest is charged on the interest added to the loan each year, as well as on the original amount borrowed.

This could eat up the bulk of the value of the property, the Consumers' Association warns.

Interest rates on equity release mortgages tend to be higher than on ordinary mortgages - around 7%.

In home reversion schemes, home-owners sell all, or part, of their home to a reversion provider and receive a lump sum, an income or both.

People who do this won't get anything like the full market value; companies typically pay between 40% to 60% of the property's current value.

Serious drawbacks

One of the main problems with equity release plans arise when circumstances change, reports Which?.

What is an alternative? Move somewhere smaller Do you have savings you could spend first? Do you really want to be paying the loan for the rest of your life? Get independent financial advice Source: Which?

For example, if someone wanted to move to sheltered accommodation, or a cheaper property, they may have to repay some of the loan.

In addition, roll-up loans might leave someone with too little equity to buy the new property they want.

People can also be hit with big redemption charges, if they decide to pay off the loan early.

While there is a general criticism about equity release plans, because they reduce the value of an estate, meaning the family will receive little or nothing when the plan holder dies.

Someone should first consider whether they would be better simply selling up and trading down, Which? said.

Think carefully

The Financial Services Authority takes over mortgage regulation in October 2004.

While mortgage based products will fall within its remit, the rules will not cover home reversion schemes.

Helen Parker, editor of Which?, said: "We advise people considering equity release schemes to view them as a last resort.

"These 'lifetime mortgages' don't have to be paid off until you die, but while this means you don't have to worry about paying off the loan now, it can cause problems if your circumstances changes, and of course you will also have less to leave behind."