Financing a place - or two - in the sun

Ian and Sandie Schagen
Ages: Ian 55, Sandie 54
Live in: Langley
Occupation: Ian: statistician, Sandie: researcher
Earn: ?70,000+ combined
Mortgage: ?75,000
Debts: None
Investments: ?10,000 in deposit accounts and ethical
stocks and shares Isa
Pensions: Both have local government final salary
scheme
Aims: To decide whether to buy property abroad

Many couples dream of buying a retirement home abroad. Ian and Sandie Schagen want to buy two - one in the US and one in Spain - for when they stop work in seven or eight years' time.

Originally, says Sandie, they had thought only of America: 'We'll get good salary-based pensions plus a lump sum on retirement, and our intention had always been to use this, perhaps with some of the equity in our present house, for a winter home in Florida.'

But they also looked at Spain, 'because we wanted to get away from this awful weather', and realised they could afford both. Says Sandie: 'Our ultimate dream is Florida in the winter and Spain in the summer, which sounds extravagant, but if we sold our house here for £245,000, we could easily buy both.'

At the moment, they are undecided: 'We were not intending to buy until next year, when the tie-in on our current mortgage ends, and planned to visit both Florida and Spain this year to make a decision on which, if either, to go for.'

They have booked a week in Spain for July, but at Easter saw a couple of properties in Florida they really liked, including one that might not be available next year. 'So we are toying with the idea of cancelling the trip to Spain and going back to Florida instead.'

This means they are buying sooner than they intended, while still tied in to their mortgage. They could finance the deal by remortgaging their present home for the 20 per cent deposit, taking a US mortgage and renting out the flat until they want to move in. 'But it's the kind of house that is best for rental purposes and would not necessarily be an ideal retirement home, so we might need to sell one property and buy another when the time came.'

They do not know if owning a property in Florida for the next eight years will be a good investment: 'If Florida house prices appreciate significantly, we could get an excellent return on our money, as we would be contributing only 20 per cent of the cost. But if property values go down, or rental income fails, we could lose a substantial sum.'

At the moment they have just £10,000 in savings because they are still paying a mortgage and seeing children through university. They also spend a lot on holidays abroad: 'We are both mad on travelling and like to go to different places each time,' says Sandie. That means that, until they retire, they would visit the Florida property once a year.

Another way of raising money is to sell their present house now and move somewhere smaller for a few years: 'We are going round in circles on the best way of doing it - and whether to do it at all.'

Adviser 1: Carolyn Corless

Ian and Sandie's plan involves several risks:
market risk (is now a good time to buy in the
US?); currency risk (what could a strong or weak
pound do to their finances?); and income risk (is
their breakeven point realistic?).

UK property is probably at or near its peak, so
now is a good time to downsize here. The UK
buy-to-let market is a bubble ready to burst, so I
would not recommend buying here for that
purpose.

Property prices in the US have been rocketing,
and against a shaky economic background they
should consider whether this is likely to continue.
Property prices in Spanish tourist areas have
increased substantially. There is better value to
be had off the tourist track, but those properties
may not appreciate in value so much and may be
harder to let. They should not worry about losing
the Florida property; good property is always
available.

They must do some sums. For how long could
they afford the property if it was let for only 20
weeks a year? Could they afford a 25 per cent
increase in US interest rates - 1.75 per cent to 2.2
per cent, say? At the moment they are confusing
emotional decisions with business ones. They
should first decide whether they are buying a
property for themselves or for investment. Then
the answers will come.

Carolyn Corless is director of Charteris Treasury
Portfolio Managers.

Adviser 2: Bina Able

Buying abroad is not a sensible choice for Ian
and Sandie at the moment. They should regard
any purchase as an investment and decide how
much risk they want to take. Borrowing to buy a
second property greatly increases the risk - some
banks lend only if the loan is repaid before
retirement.

Funding the costs from rent has problems: they
need a local manager, which can be costly; and a
tornado, common in Florida, could cut bookings
dramatically. They already realise that the best
location for renting is not where they actually
want to live, but a second sale and purchase puts
them further out of pocket.

Their income will drop substantially on retirement
so their outgoings will need to reduce as well by
then

They should look for better terms when their
current mortgage deal ends - but to clear the loan
faster rather than raise more money. Once the
mortgage is repaid and their youngest child
finishes university, they can build a deposit
without borrowing. It is not a good plan to buy a
UK property to rent out: property prices have been
rising swiftly and might fall.

Any regular savings they can make now should
go into tax-efficient plans such as Isas, as both
are higher- rate tax payers. They could choose
equity investments if they do not need the money
for at least seven years.

Bina Able works for The MarketPlace, Bradford &
Bingley.

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