Last updated 05:39, Friday, 26 September 2008

Equity release schemes, which allow homeowners to sell their homes but still live in them, should only be a last resort, a consumer group has warned.

A new lease of life: But don’t base it on an equity release scheme except as a last resort and after independent advice, says Which?

Which? said pensioners who are struggling to make ends meet and are considering equity release should first consider other options.

Which? said the schemes could be expensive, inflexible and leave people with little or no equity in their property, severely limiting their choices later in life.

It added that any money people released from their homes could also affect the amount of means-tested benefits for which they qualified.

Equity release enables retired homeowners to unlock money from their property without having to move.

People can either take out a mortgage on their home that is not repaid until they die or sell their property, with interest often added to the amount they owe, or they sell a portion of their property to a home reversion company.

The schemes are expected to rise in popularity as people live for longer, face rising care bills, and increasingly turn to their property to supplement their pension.

But Which? warned that problems with the schemes could arise if the borrower’s circumstances were to change.

It said someone who wanted to move into sheltered housing or a retirement home may have to pay back some of their loan earlier than they expected, potentially leaving them with too little equity to buy a new property.

Equity release schemes that are approved by the Safe Home Income Plan (Ship) can be transferred to a new property, but this does not always cover sheltered housing or retirement homes.

People downsizing may also find their new home is worth less than their loan, meaning some of the money they had borrowed would have to be repaid.

The group added that in some cases there could also be high early redemption charges for people who wanted to end the schemes within the first five to 10 years.

The group urged people to consider other options before turning to equity release, such as downsizing to a cheaper property, using their existing savings, or even borrowing money from family that could be paid back when their home was eventually sold.

Which? also advised elderly people who were struggling with their finances to check whether they were eligible for any state benefits that they were not claiming or grants that would assist them with the cost of living.

Philip Spiers, co-author of the new Which? guide Care Options In Retirement, said: “Equity release might seem like the solution for any pensioners struggling to make ends meet this winter. These schemes provide income while enabling you to stay in your own home.

“However, if your circumstances change you might not have enough money remaining to fund alternative accommodation, and money received through equity release may seriously alter the amount of benefits you are able to collect.

“Anyone considering equity release should do so cautiously – and only after exhausting other options. In all cases, independent, professional advice should always be sought.”