Equity release – borrowing money against the value of your house - has become an increasingly attractive way of financing retirement for elderly homeowners who find that their pension does not stretch as far as they would have wished. But some borrowers may find themselves stuck with uncompetitive deals, and switching to a lower rate of interest could make sense.

Figures recently released by the insurance giant Prudential show that the cost of living for pensioners has increased by around 9 per cent a year between 2002 and 2006, compared with the national average of 4 per cent. The same research found that rising food prices are hitting retired people far harder than any other age group. This means that some people who found themselves comfortably off once they had taken out equity release several years ago may once again be feeling the pinch – so it could pay to see if you can renegotiate your deal.

Equity release can be the ideal solution for those who are “asset rich but cash poor”, who have seen the value of their homes rocket, but at the same time witnessed their income failing to keep up with expenses.

There are a number of ways equity release can work, but the most popular method is a “lifetime mortgage”, which involves taking out a loan secured against the value of your home to release money for day-to-day spending, with the loan, plus interest, repaid when the house is sold on death.

Interest rates are fixed, so borrowers are protected against future rate rises, and those offered by members of SHIP, the Safe Home Income Plans, the trade body representing over 90 per cent of the equity release sector, also factor in a guarantee that the money owed to the lender can never exceed the value of the home.

However, those who took out loans in the 1990s or early 2000s, when interest rates were eight or nine per cent, could find they are paying out much more than if they had taken out a similar plan today. In some cases, switching to a cheaper loan could save thousands of pounds that can then be left to loved ones as an inheritance.

A spokesman of Key Retirement Solutions says: “Rates are much lower than they used to be, so if you released cash from your home with an equity release plan over five years ago, now is the time to take advantage of these lower rates."

Because of the effects of compound interest, as the interest rolls up over the life of the loan, even a small percentage shaved from the rate can make quite a difference to how much of the value of your house remains.

For example, if a couple in their sixties had taken out a loan of £70,000 at 8.2. per cent, after 15 years, they would owe rolled-up capital and interest of £228,301 because of the way compound interest works,. However, if the loan was fixed at 5.99 per cent, after the same period they would owe just £167.522, a difference of £60,779 which could be left to loved ones.

But, with interest rates rising in the general economy, is it really worth switching now? According a report earlier this year by SHIP, equity release rates continue to offer good value, despite increases in the Bank of England base rate, and the gap between the fixed rates normally used for equity release is widening compared with interest rates in the general economy.