Europa Mortgages & Foreign Currency - More Advice
Whether you are buying your property outright, transferring a deposit for your Spanish mortgage, or making regular payments of your mortgage in Spain, it is important to identify and minimise the risk that the market may move against you and make your property purchase and or mortgage costs more expensive.
Our goal at Europa Mortgages is to make sure you have all the right information and tools you need to protect yourself from fluctuating exchange rates.
Let's assume that you are buying a villa in Spain. Your currency options depend upon whether you have access to some or all of the funds you wish to transfer:
You have access to all the funds – what are your options?
If you have access to all the funds, you have two choices: one risk free and one high risk.
The risk free solution would be to buy all of the currency now, thus fixing the cost at the outset (because you will not only know the price of the villa, but also the cost of the Euros to pay for it). This is called buying currency for spot. You can then deposit the bought currency to earn some interest and send payments to the developer as requested.
The high risk strategy would be to buy the Euros each time that you are required to send them to the developer. This means that you have no idea what the property is going to cost, which could induce some sleepless nights ahead, especially if you are on a tight budget.
You do not have access to all of the funds – what are your options?
If you do not have access to all of the funds at the outset you can still play it safe. The solution is to buy one or more forward contracts.
In essence, a forward contract means that you can buy the currency now, and pay for it later (when you need to make the individual stage payments). You will be required to pay a 10% deposit now and the 90% balance upon the maturity of the contract. For example, if you wish to buy £50,000 worth of Euros, but do not need to send them for 3 months, you can agree the exchange rate now, place a £5,000 deposit and pay the remaining £45,000 balance in 3 months. If the exchange rate moves at all in that 3 month period you will not be affected, as you have bought currency at the originally agreed rate. You may actually fix a rate on all your currency requirements up to 24 months forward.
You understand and have strong views about future exchange rates – what are your options?
If you have strong views about future exchange rates, you could wait to buy your currency at some stage between agreeing to purchase the property and the date that currency is required. This applies to either buying and paying for all of the currency (a spot trade) or fixing a rate (a forward contract). Either way you are exposing yourself to currency risk.
Alternatively, if you are looking to achieve a specific rate, we can arrange a market order. This allows you to target a better rate of exchange. We monitor the markets on your behalf and should the market reach your predetermined exchange rate, your currency is bought or sold automatically. Your order is live 24 hours a day and can be amended or cancelled at any time prior to the transaction taking place.
Whichever option you decide is right for you please remember:
We always remind people that they would never agree to buy a property in the UK if they did not know how much it was going to cost them; if you agree to buy an overseas property without fixing the exchange rate at the outset, that's exactly the gamble you are taking.
I’m buying off-plan. How can a currency broker help?
When buying overseas property, you’ll have to make one or more international money transfers to complete the purchase. The issue needs serious planning especially if you are buying a new development off-plan where you will be required to make a number of stage payments during the construction of your property.
Example: UK resident buying in Spain
For illustration purposes, let’s assume that you’re a UK resident buying a holiday home in Spain:
• The developer will require an up-front deposit in Euros and then further stage payments during construction over the next 18 months, with a final payment upon completion.
• Whilst you know the price of your property in Euros, the actual cost in Sterling will be determined by the exchange rate you obtain.
• If Sterling strengthens during construction the cost will decrease, but if the Euro strengthens, then your Euro costs will increase i.e. a stronger Euro means your overseas property will be more expensive.
• As a result, until you’ve secured an exchange rate, you won’t know the final cost.
Whether you’re buying in Spain, Florida, Dubai or any other country the principles are the same.
Removing risk with a forward contract
To remove this risk, many clients buy a forward contract. This is essentially a buy now, pay later option, allowing you to lock into an exchange rate even if you don’t have all the funds available. Should the rate get worse, you will not be affected. If however you have access to all of the funds from the start and want to convert them immediately, you can enter into a spot contract. Unlike a forward contract this is a buy now, pay now option, and you will need to arrange the immediate transfer payment for the full value of the currency bought or sold to the currency broker.