STEEPED in folklore and awash with magical characters, Chile’s Chiloe Islands are pure storybook material. SARAH MARSHALL finds a reality far more fascinating than fiction.

DRESSED with lace voiles and dusty cobwebs, the twee cottages in Chelin’s eccentric cemetery give dearly departed souls an interesting window on the world. Interspersed between headstones, the small, slate-roof abodes are filled with wooden furniture and garish paintings of saints; outside, trumpet-sleeved foxgloves climb picket fences.

Tables are laid with jaundiced linens and chipped China teacups, ready to serve thirsty friends and relatives when they visit on All Saints’ Day and fill these decaying husks with life. For the remaining 364 days of the year, only spirits and spiders are at home.

It’s an unorthodox way to honour the dead, but in Chile’s Chiloe archipelago, wild imagination frequently extends beyond the realms of reality.

Home to 400 people, Chelin is one of 40-plus emerald-green islands buffering the shores of northern Patagonia from the wild Pacific Ocean. Until this year, Chelin’s residents only had five hours of electricity per day, although most were happy to muddle along.

Walking into the island’s late-19th century church, a National Monument of Chile and one of 16 churches on the archipelago given UNESCO status, it’s easy to understand the ebb and flow of community life. Shaped like the hull of a sailing boat, the concave larch wood ceiling hints at a love and knowledge of the ocean, taking worshippers on a voyage through the Christian faith introduced by Jesuit missionaries.

International recognition has saved the fragile building from collapse, although other no-less-impressive historic homes on neighbouring Quehui island haven’t fared so well. Mumbling incomprehensibly through a gummy grin, elderly resident Galindo waves at us from the window of his 140-year-old weather-worn, slatted house, where generations of his family have lived.

Bumble bees the size of ping-pong balls flit between cascading fuchsias; like Galindo’s house, the native breed are on the brink of disappearing completely.

“Many buildings on the archipelago are abandoned; they die with their owners,” says Tali Santibanez, a photographer who’s published a book about Chiloe’s houses at risk of extinction. The Santiago native, whose husband Andres Bravari is general manager at the architecturally ambitious Tierra Chiloe hotel, hopes greater public awareness will save the structures.

Such is the islanders’ fondness for their roof and four walls, some literally move them by ox cart - or even over water by raft - when settling in a new location. Search YouTube and you’ll find some astounding footage.

Local community is at the heart of everything Tierra Chiloe does, which makes sense because - fundamentally - it’s Chiloe’s colourful characters that make these islands tick.

My trip to Chelin and Quehui is one of several cleverly crafted excursions which really get under the skin of the destination, offered by the hotel as part of a full-board package.

The Williche, a polished wooden boat softened with dusky-pink cushions, thick woollen blankets and rosemary-infused pisco cocktails, glides guests between the islands along shorelines scattered with stranded fishing boats and forests of oversized rhubarb leaves splayed like a parade of parasols.

Even on land, there’s always a focus towards the water. Hovering above the ground in a streamlined block, the hotel’s bedroom windows frame fishermen in rowing boats and arrowhead ripples etched by flotillas of black-necked swans.

In October, the hotel will double in size with 12 new rooms, a spa and an outdoor pool.

A 30-minute drive from Chiloe’s airport, Tierra is located on Isla Grande, the archipelago’s main island. Three-quarters of the terrain is covered in native forest, including Bosquepiedra Park, a 12-hectare evergreen woodland now protected as a conservation area. Austrian-born biologist Elena Bochetti manages the project and takes tourists on educational trails, pointing out geographical features shaped by glaciers and plant species dating back several millennia.

We climb through a tunnel of wiry branches, velvet mosses and delicate ferns, and spend an enjoyable half hour waiting for a hummingbird chick to emerge from its teardrop nest.

Woefully little research has been conducted in the forest, but environmental activist Elena is an expert. Her childhood nanny was from Chiloe, and she recalls being enraptured by local folklore. “I always associated the islands with everything mysterious, everything good in life that was forbidden,” she says, revelling in her own subversiveness.

Although she’s extremely passionate about the forest, Elena admits many local people are still scared of the dense, dark space. Legends underpin much of daily life in the archipelago; there are tales of a goblin called Trauco who impregnates women and superstitions about rolling potatoes under the bed to determine future wealth.

One local artist decided to embody some of these myths in an eye-pleasing sculpture, which has inadvertently become one of Chiloe’s biggest tourist attractions.

Overlooking angry white caps on the Pacific Ocean, a wooden pier curves towards the horizon and drops into nowhere. Inspired by the legend of Tempilkawe, where a boatman transports souls to the afterlife on rafts made of foam, the Muelle de las Almas (Spirit Pier) was built in 2005 by art student Marcelo Orellana Riviera. Now tourists descend to fill their Instagram feeds, and resident farmer Orlando Vera has even made a business out of charging for access to his land.

Other entrepreneurs are also capitalising on Chiloe’s riches. In the capital, Castro, many of the town’s famous stilt houses, or palifitos, have been converted into guest houses and cafes. Originally erected by immigrants with no money to buy land, the buildings are propped up by wooden poles dug into the muddy riverbank. Shingle slates on the facades resemble fish scales, and at high tide the amphibious blocks appear to float on water.

Now only 216 of the properties remain, and since the Chilean government claimed ownership of the ocean, it’s impossible to build any more. Tali is planning to publish a photo book dedicated to the palifitos, and has also purchased the oldest property to convert into a boutique B&B.

Fiercely loyal to their locale, Chiloe’s residents want to protect their tradition and culture. Shop stalls are stacked with piles of blankets, socks and scarves, hand-knitted in naturally-dyed wools; on a street corner, an accordion player sings nostalgically about his love for a woollen hat, stretching wide the bellows as if opening his heart to the world.

In a fruit market, I meet 68-year-old Victoria Naisa, a jovial lady whose heavily engrained wrinkles tell a story of hardship and happiness. “I’ve been here since I was 17,” she says contentedly, reaching out to her walls of earthy, knobbly potatoes and a ceiling of spindly green beans. “This has paid for my children’s education.”

It’s sobering to appreciate how little can mean so much.

Of course, the islands are not resistant to development; for several years, there’s been talk of building a bridge from the mainland and finally it looks set to go ahead. But even once the steel and concrete have been put in place, I doubt the pace of life here will change. No matter how close they are to civilisation, the Chiloe islands will always be a world apart.

How to get there

The Ultimate Travel Company (www.theultimatetravelcompany.co.uk) offer a 12-night/13-day holiday to Chile, including three nights full board with shared activities at Tierra Chiloe, plus three nights at each of Tierra Chiloe’s sister properties, Tierra Patagonia and Tierra Atacama, as well as one night in Santiago at the Lastarria Boutique hotel. Prices start from £6,215pp and include international flights and a choice of excursions as detailed in the feature.