A Typical Foreign Exchange Scenario

In December 2005 Mr. & Mrs. Fletcher had found a property in Spain with an asking price of ?165,000 which they agreed to purchase by placing a deposit of ?15,000 Euros. As an off plan property they had a balance of ?150,000 Euros to pay by 6th April 2006. The cost of purchasing the initial ?15,000 Euros deposit in sterling (GBP) on the 12th December was £10,080 at a rate of 1.4880. If they had also purchased the outstanding balance this would cost £100,806 to purchase ?150,000 Euros.

When Mr. & Mrs. Fletcher came to make the final payment in April, the Euro had dropped back to 1.4250, the result of which was a final price of £105,263 - an additional cost of a staggering £4,457 in four months. Much of this loss could have been prevented by securing the rate with a forward contract. This mechanism is especially useful when market conditions are currently advantageous, but the currency is not actually required until a date in the future e.g., the final payment date in April.

More people than ever before have been taking advantage of a strong pound and comparatively cheaper property prices abroad. If you are considering the purchase of an overseas property, either as an investment or as a second home, it is important you become familiar with a very volatile exchange market.

Where do I start?
Establish from the outset approximately how much currency you need to buy and the timescales you have, e.g., an initial deposit and then regular stage payments or a balance on completion. You also need to decide at what time periods you will have funds available.

Where can I obtain the best exchange rate?
You need to compare like for like the exchange rate you can obtain from your bank to what a broker can offer you.

Where do I find a reputable currency broker?
Check the broker you are using is regulated by the FSA (click here to search the register) in addition to being registered as a Money Services Business with HM Revenue and Customs.

Are there risks involved when buying currency?
There is clearly potential for your property to cost more than expected if the currency markets move against you. When buying in Europe you will be provided a price for the property in Euros or an alternative currency depending on the county. It is therefore important that you establish a relationship with a broker who is able to provide you with expert advice and the best financial tools to use for buying your currency. Please be aware some currencies will be more volatile than others.

How can I buy currency for a date in the future?
You can buy currency for a future date using a 'forward contract'. This effectively means you can take advantage of a good exchange rate from the market without making full financial commitment. The rate can be guaranteed with usually a 10% deposit. This is a great option if you want to fix your costs early on, so you know exactly how much the property will cost you. This eliminates your risk and market exposure.

What can a currency broker offer me that can not be provided by my bank?
First and foremost currency brokers offer better exchange rates and lower transfer charges than a high street bank. On top of that they offer a much more specialist and personal service with an understanding of the complex and stressful foreign property purchasing process.

Does it take longer to buy through a broker than a bank?
No. Generally as brokers are experienced working within the foreign property market they understand the importance of payments reaching their destination on time. Therefore as soon as funds reach a client account they are automatically sent by international transfer known as SWIFT. It can take as little as a few hours to deliver funds to an account depending on the destination country.

What is the difference between the inter bank rate and commercial rate?
Inter bank is the real-time market rate on all major currency pairs used by banks trading vast sums between one another. They are often displayed in financial sections of newspapers and on websites. Commercial rates are the wholesale rates provided to clients who are buying a large sum of currency for a business transaction, property purchase or emigration. These include a brokers spread or margin and are lower than the inter bank rate.

Is it important I obtain a commercial rate?
Yes, very important; it is always beneficial to look beyond your bank and get a preferable exchange rate by shopping around.

It is unlikely that you would purchase a property in the UK without agreeing a definitive price first - Why do it with a foreign property?