Homeowners who take out equity release products could end up more than £500 out of pocket with many companies charging application fees, a new study shows.

Two thirds of firms offering equity release schemes charge homeowners an average of £554 in application fees, according to finance specialists Economic Lifestyle.

This one-off fee can often be added to the money freed-up from property but this consequently means that the charge increases either in line with the interest on the loan or as the property's value rises.

But people can still find a good deal by shopping around.

Mark Neal, managing director of Economic Lifestyle, said: "Retired homeowners should not have to face huge charges for taking out an equity release scheme.

"In many cases retired people are not funding a lavish lifestyle with the equity they release but are merely getting by on a very tight budget. Any additional charges often come as a nasty surprise.

"Competition is increasing in the equity release marketplace. It is now possible to find a policy that is both competitively priced and does not charge prohibitive fees."

Equity release schemes fall into home reversion plans and lifetime mortgages. The former are suitable for older homeowners who want to free-up money by selling some or all of their home to a third party.

Although they are able to keep on living in their homes, the percentage of the property sold goes to the equity release provider in event of death or relocation.

Lifetime mortgages allow homeowners to borrow against the value of their home with interest charges only starting when they die or move from their home. The mortgage provider then recoups the costs of the loan and the interest payable.