Buying a property abroad whether it is for retirement, investment or a holiday home can be just as stressful as purchasing a property in the UK. You will at some point need to convert your pounds into the local currency and with new build properties or properties with a long completion date, currency exchange Melbourne can easily get forgotten until the last minute and with some completions taking up to 18 months it is no wonder.
With so much uncertainty in the currency markets, knowing what to do for the best can be tricky. The euro since inception has performed relatively well, and has become a major currency accounting for approximately 54% of global currency exchange trade. This dominance is all relevant given the size of the Euro zone economy, and it is growing with Eastern Europe countries actively seeking to join the membership. The general trend for the euro has been upwards; it has been strengthening over the past three years. Over the past eighteen months, the euros rise has not been entirely a result of positive economic progress in the Eurozone, but rather US dollar weakness.
The dollar has made newspaper headlines on several occasions and has been the subject of conversation and scrutiny by some of the foreign exchange markets’ most highly regarded organisations. The primary driver behind this concern has been the American Trade Deficit. The U.S. deficit and their pledge to buy their way out of the deficit has been an opportunity for enormous amounts of speculation, and hence the currency market has become increasingly volatile.
Volatility makes a market; if it were not for volatility then hedging instruments such as Forwards would not need to exist. The industry has seen exponential growth in the use of forward contracts by financial institutions, corporations and individuals involved in the buying of international property.
The market place has become so volatile, in particular the U.S. dollar, which in turn has been the catalyst to moving other currencies – primarily the euro. As the US dollar has fallen the euro has risen. Investors, speculators, financial institutions – with particular reference to Central Banks have bought into euros as a method of reserve diversification and as a method of retaining value.
When you agree to purchase your property in Spain, you will concede the costs in euros. To know the exact amount will not become apparent until you have purchased the total sum. Over the past 12 months the euro has strengthened by more than 5%. For a property costing €200,000 this would mean an additional £7,000 to your original estimation. To avoid this adverse rate fluctuations one option is to ‘Forward buy’. This allows you to pre-order your euros at a guaranteed forward rate for a specified date in advance.
Forward buying is a ‘buy now, pay later’ option. After securing the forward rate, you are required to pay 10% of the amount you are exchanging which is held until then remaining balance is paid in full. For example; Mr. & Mrs. Jones have agreed to purchase a property in Spain for €250,000. At the time of signing, the sterling/euro exchange rate was 1.45 and so they based all their calculations on this. They have paid the holding fee and the 10% deposit so there is just the balance of €224,500 which is due in 6 months time. They need to convert the balance of their funds at an exchange of at least 1.45 to ensure they don’t end up paying more for the property. Because they liaised closely with their foreign exchange broker, who monitored the currency market for them, they managed to fix the balance of the property at a rate that was better than 1.45.
Not everyone purchasing a property abroad needs to forward buy and can still benefit from using a company like us. Buying your currency as a ‘Spot’ contact still carries the best exchange rate and is ideal for payments for immediate delivery such as deposits and stage payments. It may be that you want to wait to see if the pound strengthens against the euro and you make further savings.
For more information on forward buying or any other questions related to purchasing abroad; contact Jennifer Saunders who is head of the Private Client desk at Associated Foreign Exchange, AFEX. And has over 4 years experience in FX Markets and clients purchasing abroad.