John Stepek guides you through the key considerations of foreign exchange when purchasing property overseas.
One feature of the post-Brexit landscape has been aggrieved travellers posting outraged pictures on social media of airport bureaux de change offering less than a euro for a pound, often with comments along the lines of “thank you, Brexit!”
Yet the reality is that, while the pound has certainly fallen hard against the euro, it has yet to drop below €1.07 in the currency markets. In other words, there has never been a point at which the pound has been worth less than the euro. So if you’ve swapped money at parity or below, you’ve merely been another victim of the great foreign currency exchange rip-off.
Foreign exchange is one area where the finance industry can still slot in hidden costs and large mark-ups without too many people noticing. And while it might not matter that much if you’re changing £100 in a hurry, for a bigger purchase – such as a property abroad – then it clearly makes a huge difference.
There are several other issues to consider when buying a property abroad, besides the purchase price of the property.
Firstly, when transferring a large lump sum such as a house deposit, every little helps on the exchange rate you get, so shop around for the best-value provider. There are two main aspects to the costs: any transfer fees and the exchange rate itself. You need to consider the all-in cost – in other words, exactly how much foreign currency will you get for a given sterling sum. First check the exchange rate in the money markets (try bloomberg.com, or uk.finance.yahoo.com). You won’t be able to match that rate, but it does give a clear idea of what the best possible rate could be. It’s also worth getting a quote from your bank, but mainly for the purpose of comparison – your bank will rarely offer the best deal.
In most cases, for a large lump sum, your best bet is to use a specialist foreign exchange broker. Popular brokers include Moneycorp, Caxton FX or Currencies Direct, but there are many more. Make sure the broker is authorised by the Financial Conduct Authority (FCA), Britain’s financial industry regulator (you can do this by searching the FCA register at fca.org.uk/firms/financial-services-register). All FCA-registered firms must hold their clients’ money separately from their own. As a result, if the company goes bust, client funds should remain intact.
Bear in mind that exchange rates can be precarious. Buying a property abroad is stressful enough without the danger that your hard-earned deposit could shed ten per cent of its value overnight if something rattles the currency markets. Foreign exchange brokers can allow you to lock in a specific rate for a year or more. So if you’ve decided on a house, but the deal isn’t due to complete for another six months, you can fix the rate today and have peace of mind that you’ll still be able to afford it when the time comes.
FIXED RATE, OR NOT?
Secondly, transfers for living costs once you’ve bought the property are another consideration. If you are moving thousands of pounds on a regular basis (say from a pension denominated in sterling), a specialist broker is likely to be your best bet and, as before, you can lock in an exchange rate. If you decide against doing so, then you need to be prepared for the exchange rate to move up or down – sometimes quite significantly. For the sake of comparison, in summer 2015, £1,000 could have bought you between €1,350 and €1,400. Today, your best rate will be in the region of around €1,100. That’s a hefty bite out of your disposable income, so consider how much risk you can afford to take.
Thirdly, currency risk is also worth taking into account if you are buying with a mortgage. Generally speaking, it makes sense to match your debts to your income. If you are paid in sterling, then have a sterling mortgage. This removes the exchange rate risk from the equation – if the euro spikes against the pound, you wouldn’t want to be paying a euro-denominated mortgage with a sterling income. Equally, if you are renting the property out, and the rental income is
in the local currency, you might consider a local currency mortgage instead.
Finally, don’t spend ages trying to figure out where the pound or any other currency will go next, as no-one knows. Shop around for the best deal you can get at the time you need the money, get the transaction done – then put it out of your mind.
John Stepk is executive editor of Moneyweek magazine.