Retired homeowners are estimated to be holding some £700 billion worth of property. Many are taking equity release from their property via schemes that give money in return for an interest in the property.

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.

Now Which? magazine reports there are big flaws with some of the plans, which could be punitive, complicated and expensive.

In one type of scheme pensioners borrow money and agree to pay it back when their property is sold. But, says the Consumers’ Association, this can be very punitive as interest is added to the loan, so later, interest is paid upon interest already accumulated. The amount owed can grow very quickly, eating up the bulk of the value of the property.

In another type of scheme, homeowners sell all, or part, of their home to a ‘reversion’ provider and receive a lump sum, an income or both. However, the Association warns people who do this that they won't get anything like the full value of their home as companies typically pay only 40% to 60% of the property's current value.

What are the problems?

• The loan may have to be repaid if circumstances change. For example, if one of the pensioners needs to go into a retirement home or if they want to scale down. The scheme could leave them with too little equity for these options.
• Redemption charges could be large if people decide to pay off the loan early.
• The family may receive little or nothing when the plan holder dies.

Are there any other options?

The Consumers’ Association recommends looking at other options before considering equity release. People should view them as a last resort warns Helen Parker, editor of Which? magazine.

• Get independent financial advice.
• Think about moving 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?