Some plans could leave you out of pocket

Pensioners are able to obtain cash advances secured against the value of their houses through equity release or home reversion plans.

Under such schemes, people over the age of 60 sell their home, or a percentage of their home, to a lender which collects on the homeowners death.

In return they receive a cash lump sum, or a monthly income, or a combination of both.

According to the Council of Mortgage Lenders (CML) nearly 12,000 plans were sold during the first half of 2003, up from 5,900 during the same period last year.

Overall, total borrowing by pensioners through equity release schemes stands at �2.3bn.

But the CML believes that in future the equity release market could reach �100bn.

"Many pensioners are tempted by equity release as they are asset rich as a result of increasing house prices but cash poor due to low retirement income," a spokeswoman for Age Concern England told BBC News Online.

Roll-up

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

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

These plans are not to be entered into lightly it is important that people research the market Susanna Mordaunt, Age Concern

Unlike a normal mortgage, interest is added to the principal and paid back on the owners' death, rather than repaid during the borrower's lifetime.

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.

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

Life change

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

But homeowners who opt for this form of scheme will not receive anything like the market price of their house, with lenders typically paying between 40% and 60% of the property's current value.

One of the main problems with equity release plans arise when borrowers' circumstances change.

For example, a borrower wishing to move to sheltered accommodation, or a cheaper property, may have to repay some of the loan.

In addition, roll-up loans may leave borrowers with insufficient cash to buy the new property they want.

Borrowers who decide to pay off the loan early can also be hit with big redemption charges.

"These plans are not to be entered into lightly. It is important that people research the market, take independent financial advice and discuss their decision with members of their family who are due to inherit," Ms Mordaunt said.

Regulation

The FSA takes over mortgage regulation in October 2004.

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

In June, the Treasury announced plans to consult on the regulation of equity release schemes, often used as a means of achieving retirement income.

The Treasury has said the review, part of a wider look at the state of pensions, could mean the FSA will win the power to oversee the sector and ensure elderly people do not lose out.