My wife and I have been considering buying a holiday home but are unsure whether it is a sensible thing to do. What would your advice be about this and what are the alternatives?
It is an ambition of many people to own their own home in paradise, where the sun always shines and the cost of living is low. But, in reality, it is not always as easy as it seems, nor is it always a wise investment.
Idyllic holidays can often prompt people to consider buying a place of their own, particularly in France and Spain. This is further supported by the British mentality that it is always better to own property than rent. It is a commonly held belief that property ownership offers wealth creation and avoids the needless waste of money of renting someone else's property.
But buying a house abroad can be very different to the process you may have experienced here and there are a whole raft of things to consider.
Cost. You will be committing a large amount of capital to an investment that may not return any real value to you for many years.
Finance. If you intend to borrow to finance your purchase, make sure you talk to an IFA. The strength of sterling will influence your decision on whether you take out a UK loan or borrow from a local lender.
Conveyancing. This will undoubtedly be more expensive than it is here. Recent research has shown that UK conveyancing costs are comparatively low.
Running costs. Building insurance and local taxes, such as the equivalent of our council tax, may also set you back more each year than they would here.
Inheritance laws. These will vary widely from country to country. You will be affected by the inheritance laws of the country in which your property is situated.
Inflexibility. You will need to be sure that you are happy to return to the same location every year for the rest of your life.
Usage. Do not forget that you will only be able to use your holiday home for a very limited period each year. It may be possible to rent the property for the remainder but it is often very difficult to manage that process. Remember, it is not easy to know if and when the property is let out.
The alternatives that you could consider are timeshare properties and holiday bonds.
For many, the purchase of a timeshare is the nearest they will get to owning a holiday home abroad but without the attendant problems of security, cleaning and high standing costs. They can meet the same friends each year and know that the leisure facilities and accommodation are kept in good condition.
Others view it as a way of seeing the world – using an exchange organisation – in the knowledge that the foreign resort will be a similar standard to their own resort. With over 4,400 resorts to choose from, few will be disappointed. But there are often problems which buyers are seldom told about.
Excessive profits made by management companies. Most timeshare resorts are managed on a day-to-day basis by the developer or one of his subsidiary companies. Long before there were any owners at the resort, the developer wrote the constitution guaranteeing that he or his subsidiary company carry out all the routine maintenance and management of the resort.
Difficulties in making a resale. Owners have complained that attempts to sell their timeshare have been frustrated by the developer, resulting in either a failed sale or a sale at a very poor price. This results from the developer retaining effective control of the transfer of ownership.
Failure to pay the management fee. Many owners' clubs or management companies have the right to terminate the membership of owners failing to pay management fees. This is not a good way of getting out of an unwanted timeshare.
A holiday bond is an investment where the main benefit is the use of holiday accommodation and subsequent savings on the cost of package holidays, timeshare ownership or property purchase of a similar standard. The investment entitles the bondholder to an annual number of points which are exchanged for use of holiday accommodation, normally at a range of resorts or properties in different locations. Accommodation is usually of a clearly indicated standard.
Holiday bonds are normally arranged as life insurance bonds. The bonds have an investment link to a property fund and provide a relatively low level of life cover. They can be encashed (normally there is little or no value in the early years) but are intended as long-term investments.
The underlying investments in holiday property do not normally generate income. Any growth in the property fund therefore depends primarily on the capital appreciation of the property portfolio.
Holiday bonds can offer what often appears to be the ideal solution. They can be purchased for a relatively small outlay compared with ownership or timeshare, are extremely flexible in providing access to a wide range of holiday properties, are easy to encash and offer excellent value for money.