Dealing with Foreign Currency Exchange When Buying Property Abroad

Despite the recent economic turmoil in the UK and across much of the rest of the world, many of us still maintain an interest in buying property abroad.  It seems to be a British passion and a national weakness!

Until recently, one of the most overlooked financial elements of buying a property abroad was the implication of volatile exchange rates on a purchase price.  Since the pound took a nosedive against the euro so spectacularly last year, exchange rates have now been on all our minds, and never more so perhaps than when thinking about large transactions such as those related to buying a home overseas.

In this report, with thanks to World First, a leading foreign currency exchange brokerage, we can explain all about dealing with foreign currency exchange when buying property abroad so that you can secure your pounds against the currency you’re interested in investing with.

Whether you’re paying cash for your property or taking out a mortgage in the local currency, you will have to transfer your pounds sterling into the currency you will be making your payments in.  How you go about completing your transfer(s) could make a huge difference to the sterling price you ultimately pay for your property – and therefore, it could make a huge difference in terms of bagging a bargain property abroad or not, and when and if you will begin to profit from your place in the sun.

By simply keeping an eye on the market and knowing how you can make exchange rates work for you can literally pay dividends.  Below we list some of the top tips from currency exchange experts to help you in this process:-

Identify Your Budget for Your Property Abroad

Setting a budget sounds obvious and it’s probably one of the first things you thought about when you finally fixed on buying overseas real estate.  But remember, the price of your overseas property will differ from the actual cost of buying the property because of exchange rate fluctuations primarily, but also because of the extra fees, charges and taxes you will have to pay.

When exchanging large sums of money from sterling to a foreign currency, the currency exchange rate will determine how much you end up paying for the property before additional fees are added in.  For example, last August a house on the market in Spain with an asking price of €250,000 would have cost you £194,850.  However, by the beginning of September that price would have gone up to £204,580.  That’s an increase of £9,730 in a matter of weeks simply because of a fluctuation in the value of the pound against another currency – in this case, the euro. 

Keep Up with Currency Exchange Rate Fluctuations

Small shifts in foreign currency exchange rates are common and happen in short spaces of time.  So during the course of a day, exchange rates are constantly going up and down.

Imagine entering into a contract to buy your dream property abroad.  Before you’ve paid for it the exchange rate shifts to go against you by 10%.  That means that the sterling price you’re paying will effectively increase by 10%.  That could have major repercussions for you if you’re on a tight sterling budget.

So, don’t leave your foreign exchange transactions to the last minute.  It could leave you exposed to the prevailing exchange rate and you may not have adequate funds to meet payments on the due dates for example.  This could lead you to being liable for penalty payments or you may lose your property abroad altogether. 

The good news is however, you can protect yourself against negative currency exchange rate fluctuations.

Expert Strategies for Beating Exchange Rate Movements

Doing your homework on the different foreign exchange transaction types will pay off in the long term if you do decide to go ahead and purchase property in another country.  Foreign currency exchange arrangements include the following, and all have been explained here by currency exchange experts, so you can trust in their knowledge: -

1. Spot transactions

If you already have the funds in place to buy your overseas property, you could arrange a spot transaction.  This is simply the exchange of one currency for another at the current market price where the settlement happens within two working days.

2. Forward transactions

A foreign exchange forward transaction is a contract to exchange a specific amount of one currency for another on a future date at a predetermined rate.  These can be arranged for any period of time - from three days to two years in the future. 

A deposit is required to hold the rate with the balance of the payment made on the settlement date.

3. Currency options

Like a forward transaction, a currency option allows you to exchange a specific amount of one currency for another on a future date.  However, rather than setting the exchange rate you will transact at, you can guarantee a worst case scenario rate, but also benefit if the rate moves in your favour.

There are a number of currency options available and the right one for you can be tailored to your specific needs and appetite for risk.  Currency options can be arranged for any period up to two years in advance.  Some options require a premium and others are zero cost.

4. Regular payments

If you are taking out a foreign currency mortgage on your overseas property, you will need to make regular, smaller payments.  But the costs could still add up if you don’t shop around for the best foreign currency exchange rates.

Currency specialists offer a regular payment service where exchange rates and fees are low.  In fact, you could save hundreds of pounds every year if you make your regular currency transfers through a specialist currency brokerage such as World First rather than with your high street bank.

It is worth noting that most of the above transactions cannot be made through the bank either, and you would need to talk to a specialist currency broker to see what would be best for your specific needs.  Using a broker will also allow you to receive commercial exchange rates, personal service and professional market knowledge otherwise reserved for major global investors.

We would like to thank World First for their assistance with this article.  They are leading Foreign Exchange brokers that work for both private individuals like Britons seeking to buy a place in the sun for example, and international companies.  They have offices based in London, Asia and Australia and if you would like to see whether they can help with your foreign exchange requirement you are invited to email your query across to .(JavaScript must be enabled to view this email address) or call +44 (0) 207 8012 364.