Buying a property overseas and transferring funds to pay for the purchase exposes you to the currency markets. They are volatile and ever-changing, and can add another layer of stress to the process if not properly managed.
Being prepared can make all the difference. Here’s why.
Why you shouldn’t leave your transfer to chance
Big political events, data releases, and even commodity price shifts, can all cause exchange rates to move suddenly. This means the space of a few days (or even hours) could drastically change how much money your overseas property costs in sterling.
A very pertinent example is the day the results of the EU referendum were announced. In the space of 24 hours, the GBP/EUR exchange rate lost seven cents, plummeting from €1.3099 to €1.2307.
This means that someone needing to send enough Sterling overseas to cover the cost of a €200,000 property purchase would have needed to send £152,683 on the 23rd of June, but on the 24th of June that same property would have cost £162,509. That’s very nearly £10,000 extra; not something the average person can simply rustle up at short notice.
A sudden movement in the currency market could be the difference between being able to afford your dream property or having to search for something else.
Obviously the referendum is an extreme example, but high-impact events rock the currency markets more often than you might think. Sterling took another battering in June thanks to the shock result of the UK general election, falling -2% literally in the space of seconds, and there are more political developments on the horizon.
But what can you do about this uncertainty?
Paying it forward
International money transfer specialists like Currencies Direct offer the ability to fix an exchange rate when the market is in your favour for use up to a year down the line. By paying a deposit now, you can protect that rate even if the market should significantly worsen. You can set a specific date on which you buy the currency, or leave yourself a small window of opportunity – usually a month.
This way, you can ensure you’re able to budget effectively for your transfer. Someone who secured a forward contract at the beginning of June 2016 would have been able to buy €200,000 at the beginning of June 2017 for £143,781; someone who had to use the going market rate would have needed £174,687. That’s a whopping £30,906 more thanks to 12 months of steady Sterling depreciation.
Stay on budget with a forward contract
As well as helping you save money, a forward contract also makes it much easier for you to budget and plan ahead. If you know a €200,000 property will cost you – say – £175,000, then you have a clear target to aim for.
If you are planning on saving your way to a foreign property, you’ve got a defined goal that can be broken down into monthly or weekly targets.
If you’re looking to raise finance, it will also be much easier to secure a mortgage if you know exactly how much you need to apply for.
And if you are planning on selling your UK home to fund the purchase, you have a clear idea of what the asking price needs to be to ensure you can afford your overseas home.
How to get a forward contract
It’s easy to set up a forward contract. Specialist currency brokers like Currencies Direct offer free, no obligation accounts so you can register and keep track of the markets. They’ll provide regular market updates and forecasts to help you decide when the market is strong enough that it makes sense to lock in an exchange rate. Forward contracts are easy to put in place with the assistance of a dedicated Account Manager.
Once you’ve got a plan in place, you can sit back and relax, forgetting all about the volatility of the exchange rate markets – simple!