Home reversions are schemes in which cash-strapped older people can sell a share in their home to a company in exchange for a lump sum and lifelong legal right of residence. Laura Slattery reports.

For older people who desperately need supplementary household income, the schemes might seem appealing because they allow them to raise money on the back of their property without having to trade down - a prospect that could involve moving to unfamiliar surroundings, breaking established daily routines and losing touch with neighbours.

The main catch with these schemes, which are sold in Ireland by Residential Reversions Limited (RRL) and Shared Home Investment Plan (SHIP), is that the cash payment for the share of the house being sold is usually much less than the actual market value of the share.

Most homeowners - and their future benefactors - will come to the conclusion that this is a pretty big catch.

The problem with selling off shares in property assets at knock-down prices extends beyond a shrunken inheritance for family members.

According to James Wyse, managing director of RRL, 50 per cent of the people who have applied for its products this year are using the money to help their children get on the property ladder or set up a business venture.

But elderly homeowners could find that "unlocking the equity" in their home to help their children proves an expensive mistake if several years later they suddenly need to raise as much money as possible for residential nursing care or home help.

For example, a 50 per cent share of a property with an open market value of €300,000 is effectively worth €150,000 to the homeowner.

But if he or she sells a 50 per cent share to a home reversion company, they may get as little as €75,000 for the share. (The exact value will vary depending on the company and the age and gender of the homeowner - a woman will get less than a man because of her longer life expectancy, while a couple will get a smaller sum again.)

If the homeowner later needs to move out of their home anyway due to frailty or illness and raise funds for long-term residential care, he or she will only own 50 per cent of the home.

In the meantime, the value of the property may have escalated to, say, €350,000, as a result of house price inflation. Instead of being able to get access to this money, they will only have €175,000 (50 per cent share at current price) plus whatever is left of the original €75,000 cash sum. The home reversion company will pocket €100,000 from the deal.

It isn't always the case that homeowners receive a substantially lower price for their property shares. In one "variable share" contract sold by SHIP, the cash payment is close to the market value of the share, but the percentage of the property that this share represents increases the longer homeowners reside in the property. But this means that if the homeowner has a health emergency later in life, they will have even smaller assets to rely upon to fund their care.

Fears for their future health needs may put homeowners off the idea of using a home reversion scheme for some of the other reasons suggested - home improvement, travel, a holiday home, a new car or a pension boost.

This week, RRL announced that it has rejigged its product to include what it calls a house price inflation guarantee and an inheritance plan guarantee.

If there are "exceptional gains" in house prices during the life of the home reversion scheme, RRL will share the proceeds of this gain.

For example, an elderly couple sells a 50 per cent share in their property, which has an open market value of €400,000.

RRL then calculates a nominal inflated house price using the Consumer Price Index (CPI) as a measure of inflation and a fixed 5 per cent annual rate of house price growth.

After five years, the nominal inflated house price is €577,598, based on a CPI rate of 2.5 per cent. If the house sells on the open market for €650,000, RRL suggests, the nominal price is subtracted to calculate the exceptional gain - in this case, €76,402.

RRL takes its 50 per cent share of €36,201 and passes half of it - €18,100 - back to the homeowners.

This sum, however, may be scant consolation to homeowners who have sacrificed half of such spectacular gains on their property.

Meanwhile, RRL has also decided to give an additional cash payment to homeowners or their beneficiaries if the plan finishes within four years - in other words if both homeowners pass away or move into long-term care.

For example, a couple that sells a 50 per cent share of their €400,000 property will get a cash lump sum of €100,100 from RRL. If the plan finishes in year four, the total amount they receive will be 55 per cent of RRL's 50 per cent share, or €110,000. This gives the couple or their beneficiaries a further sum of €9,900.

The additional payments may assuage some of the "what if?" fears of homeowners. But critics of home reversion schemes describe them as a last resort.

One alternative to home reversion schemes is Bank of Ireland's Life Loan, where older people can borrow against the value of their property and not have to make any repayments until they leave the property or it is sold - often after their death.

The catch here is that the initial 15-year fixed-rate is 6.25 per cent and, with no dents being made in the outstanding loan, the total interest bill will be a high price to pay for the released equity.

National Mortgage Services, which distributes SHIP's products, uses the tagline "you could be sitting on a goldmine", while RRL describes home reversion as "the key to a happier retirement".

But homeowners in dire need of a lump sum should seek legal advice before entering into any arrangement in which a private company or bank can profit from the value of their homes.