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Equity release is a form of financing, often used by those in retirement. It isn’t conventional, and it comes with a host of caveats – so is it suitable for buying property abroad?
Approximately 40% of second homes owned by UK residents are abroad, according to government data for the year 2021-2022. Most of these homes are located in Europe, in countries such as Spain and France, with a small percentage in the US.
The survey also revealed that most people keep their second homes as holiday homes – and this trend hasn’t changed since the data was first collected in 2010.
For those thinking of buying a holiday home abroad in retirement, financing options can be limited. While equity release could be worth considering, it does come with a few important things to remember. Below we explain:
Read more: A guide to buying property abroad
What is equity release?
Equity release is a form of borrowing, just like taking out a credit card or using a personal loan to purchase a car. However, it’s specifically targeted at homeowners aged 55 and older, with the amount that can be borrowed dependent on the value of their home and their age.
Once the sum has been decided, it will be released tax-free and the repayment plan will begin. What makes it different from other forms of financing is that only interest is repaid until the borrower dies or moves into long-term care. At this point the house must be sold and the original capital repaid to the lender.
Borrowers are not obliged to make each monthly interest payment to the lender. But as an incentive to stay on track, the interest will be compounded if the repayments are not made.
Our guide illustrates how your repayment plan could balloon if you keep delaying your repayments.
Read more: Which type of equity release is best for me?
How do you buy property abroad
There are several ways to buy property abroad, which are explained in more detail in our guide.
If you’re planning to buy property overseas without taking out a mortgage, you’ll need to send a large sum of money abroad. That puts you at the mercy of the exchange rate and even a slight fluctuation could cost you thousands of pounds.
To illustrate this, suppose you wish to buy a two-bedroom home in Greece for €150,000. At an exchange rate of €1.16 per pound you’ll need £129,146 to buy the property.
However, the next day the exchange rate changes and it’s now €1.15 for every pound, meaning you require £130,435 to buy the home. It’s an increase of £1,289 from the day before.
To protect your purchase from such fluctuations, certain money transfer providers allow you to lock into a forward contract. Under this arrangement you’ll be fixed to an exchange rate throughout the transaction, protecting you from inevitable fluctuations.
Read more: The best ways to send money abroad
Buying property abroad? Lock into a forward contract with Xe
Forward contracts provide certainty, a peace of mind that you’ll be protected from future currency fluctuations. So take out a forward contract with Xe and use its “buy now, send later” function to send money abroad.
As one of the biggest names on the market, Xe is by used millions each year. It’s been running for more than 30 years and can send money to more than 200 countries.
Can I use equity release to buy property abroad?
“Equity release can be a great way of purchasing a property abroad, whether it’s to help put down a deposit for a mortgage or purchase it outright,” said Andrew Morris, senior equity release advisor at Age Partnership, a financial planning firm.
However, equity release will only be able to help borrowers fund the purchase of a property abroad – not move to their new home indefinitely.
“This is because you must maintain buildings insurance as a condition of equity release and your buildings insurance provider will specify how long the main residence may be left unoccupied for,” Morris explained.
He said most buildings insurers require you to live in your home for six to nine months of the year.
In addition, equity release requires its borrowers to pay off their own mortgage first. This could therefore affect the amount remaining to buy property abroad.
An estimation of how much you could release will help provide an indication of what you could do with your money. So use our calculator below to get started.
Can I buy a property abroad outright using equity release?
According to data from the Equity Release Council, the industry body, the average equity release customer borrowed just over £79,000 in the final three months of 2023. This was £27,000 less than the average customer was able to borrow in the same period in the previous year.
David Burrowes, from the Equity Release Council, said much of this was due to a rise in interest rates, which forced many advisers and borrowers to be more cautious with their lending.
“This resulted in loan sizes shrinking and fewer people borrowing for more aspirational reasons,” he added.
With this figure in mind, it’s perhaps difficult to find a home to buy outright in most European countries.
The Notaires de France said the average home in Marseilles, a city which lies in southern France, costs just €402,000, or nearly £346,000 at the time of writing. It’s a similar story in the Netherlands, its official statistics agency priced the average home in the country at about €432,000, or £371,000.
Other countries, meanwhile, are more affordable. Spitogatos, a real estate website in Greece, said property in central Athens cost €2,073 per square metre on average. This puts the price of a 50 square metre apartment at nearly €104,000, or £89,000.
Are there alternative options to consider?
Equity release isn’t designed for mass market consumption; it’s a form of lending targeted at a specific cohort of borrowers.
This is why Morris encourages people to review other areas of their finances first, before committing to equity release. He said an adviser will go through your savings, pension pots, and even the mortgage on your current home to identify other, potentially better, options.
“These could be a more cost-effective option than equity release. It all depends on your personal circumstances,” he explained.
In addition to the indefinite monthly interest repayments with an equity release plan, buying property abroad comes with other charges which you’ll need to factor into your monthly budget.
Owning a property in Spain, for example, means you’ll need to pay a local homeowner tax. On top of this, you’ll need to budget for maintenance fees, insurance costs and, potentially, community charges if it’s part of a development.
If you don’t have a local income, it means you may need to send money abroad more regularly and Morris advised home buyers to budget in that case for exchange rate fluctuations against the pound.
Read more: Ten alternatives to equity release
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