How to finance the great escape

After several years of meteoric house price rises, a record number of Brits are cashing in the equity on their properties to purchase a second home. Ginetta Vedrickas looks at what your money will buy in the most popular country, Spain

According to the Council of Mortgage Lenders, equity release is more popular than ever, with many homeowners using newly sprung cash to fund homes abroad. But with reports of a hike in interest rates looming large, will this dampen the enthusiasm of overseas investors using this method of funding? "Not at all," says Barbara Wood of The Property Finders, which sources property in Catalunya, Andalucia and Madrid. "It doesn't seem to be entering their consciousness and, if it does, people realise that any half, quarter or whatever percentage-point addition it turns out to be, will only take them back up to the rate it was 18 months ago anyway."

The CML has found that, in the first half of this year, homeowners borrowed £498m through equity release mortgages, a rise of 121 per cent from last year. They estimate that 11,700 new mortgages of this type were taken out to the end of June with an average loan of £43,000. Spain still tops the destination list for British buyers, and agents report that many fund overseas purchases by releasing equity from UK homes that have risen steeply in value. "Even very young buyers can find that they're sitting on homes worth at least £250,000 and often a lot more, so it makes sense to use some equity from their homes," says Wood.

Many agents cite increasing dissatisfaction with UK pensions for the overseas boom, along with a feeling that the UK market has little room for further growth. "Where else can they go but overseas?" asks Wood. All her clients now demand a well-researched market before buying: "Nearly all my clients tend to be extremely business-like. They want full information as to whether buying inland or in a very rural position will affect rental income. Buyers seeking a dream home abroad solely for their own use are now rare."

David Johnson of Moneycorp, an organisation that helps to secure favourable interest rates for buyers, is also witnessing huge numbers of this type of customer: "They've sorted out their equity release and now they are approaching us to move money over and to make sure they do not lose out to fluctuating interest rates."

Mark Gidding owns a cottage in Bedfordshire valued at around £350,000. Recently he released equity of £90,000 for a first stage payment to buy an apartment off-plan at La Sella Golf and Country Club, which will cost him £175,000 on completion. "We looked into all ways of funding the project but this was the cheapest and, if I have any problems, the bank will be easier to contact here." He intends to fund the second and final payment through the same method. "That's unless the interest rates change dramatically, but I don't believe that they will."

Gidding is unconcerned about potential rate hikes or property crashes: "The market is very strong, especially in the area where I live, and I'm not stretching myself too much as the monthly payments will still be very affordable." He has this advice: "Borrowers sometimes factor in their anticipated rental income, but I don't think you can totally rely on being able to rent out property every month of the year, so make sure you can still afford the payments."

Sales manager Lynne Dickens of Headlands, which sells property in Spain and Cyprus, has also noticed a surge of equity release buyers, particularly in the latter. "Apartments in some parts of the island still sell for as little as £40,000 or £50,000, with villas from the £80,000 to £100,000 mark. They're joining the EU and everyone anticipates price rises there, so it does seem to make good financial sense."

Headlands has a range of property to tempt those sitting on sizeable UK assets, such as Gata Residencial, close to Gata de Gorgos near Denia in the Costa Blanca, where they are selling a three-bed detached villa with pool for £245,000. Santa ClaraVillas, a luxurious development in a private 360-acre estate, scattered amid the fairways in an exclusive area of Marbella, offers a panorama of sea and mountain views with prices from £375,000 for three-bed semi-detached villas and £607,145 for four-bedroom detached homes.

Michael Coogan, director general of the Council of Mortgage Lenders, sees a pattern: "Older people are increasingly in a situation where most of their wealth is tied up in their home. Equity release can make a lot of sense for some of these owners, especially if they do not wish to move or trade down. The key priority is to make sure that these borrowers, some of whom may be vulnerable, truly understand the nature of an equity release mortgage."

Older homeowners keen to release equity to fund a sunny bolthole may be interested in Sensara, a retirement complex under construction in Benalmadena on the Costa del Sol that is targeted exclusively at buyers over 55. Set within 11,000m2 of grounds near the traditional white village of Benalmadena Pueblo, 150 one- and two-bedroom and duplex apartments are being sold by Overseas Homesearch, with prices for one-bed properties starting from €134,906 to €340,057 for penthouses.

There are other ways to fund a move abroad. Andrew March bought his three-bed townhouse in Murcia from Country Estates, who he now works for, after selling his haulage company in Kent. "I'm renting my UK home for around £600 month but am paying just £230 for a mortgage here which gives me a better quality of life and the cost of living is so much cheaper."

www.moneycorp.com, 020-7808 0500

www.overseashomesearch.co.uk, 0870 240 3258

Headlands: 01933 353 3333

www.thepropertyfinders.com, 01908 218753

www.countryestatespain.com

The next Homes Overseas Exhibition, is at the Royal Armouries in Leeds, 1-2 November