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.