Currency Exchange

Currency Matters

If you were buying a property in the UK you probably wouldn’t do it if you didn’t know what it would cost you. However, if you agree a deal with a property agent and then do not buy your currency straight away then that is exactly what you are doing – the price is moving up and down with the currency market everyday! Here’s a guide to how you can avoid paying more than you expect to for that dream home.
 

Guides you through:

• Effects of Currency Rate Moves
• How to Protect the Price of Your Property
• Spot and Forward Contracts Explained
• Useful Tips

Effects of Currency Rate Moves

The fluctuations in the exchange rate between the Pound and the Euro can seem small but they make a significant difference when it’s the sort of amounts required for a property purchase. For example, if you were looking to buy a property for 250,000 Euros the rates moving between July and August this year meant that could have either cost you:

a)6th July GBPEUR 1.4422 Eur250,000 = GBP 173,346.283
b)1st Aug GBPEUR 1.4875 Eur250,000 = GBP 168,067.23

That’s a difference of GBP 5,279.05 in seven weeks!

It’s not just the Euro either. Many currencies move, on average, around 1% a day! If you were buying a property in US dollars for example

a)17th July GBPUSD 1.8176 USD 250,000 = GBP 137,544.01
b)8th Aug GBPUSD 1.9145 USD 250,000 = GBP 130,582.39

That’s a difference of £6,961.61 in six weeks!
 

How to Protect the Price of Your Property

There are essentially four different approaches to buying the Euros you will need to purchase your property.

1.Wait until you have to pay it – This is basically doing nothing until the due date of your payment. This clearly isn’t ideal because as the rates are moving everyday you will not know exactly what it will cost you until the last minute. Not many people are happy to go for this approach which can be aptly described as ‘pot luck’

2.Buy all the currency now – If you have to pay for the property in 6 months time you could simply buy all the Euros and you would know exactly what they would cost. If you have a Euro account you could deposit the funds in that account and accrue interest on them. This solution means you will know what it will cost but you need all the funds available to do it. Often when people are buying a property overseas they are often selling or re-mortgaging a UK property and hence having the full amount of funds available and then ‘tied-up’ in Euros waiting to be paid is not always convenient.

3.Fix the exchange rate you will get in the future – This may sound strange its very simple and the most popular way of knowing what your property will cost. If you speak Globex Foreign Exchange they can offer you a rate that you will get in the future. So, if you have to pay for your property on Jan 25th 2007 they can give you rate that you will definitely be able to get on Jan 25th 2007. Say, for example, they offer you a fixed rated of 1.4900 Euros per Pound. You can then agree to that rate and it means you will definitely get 1.4900 on Jan 25th 2007. You will normally need to put down 10% of the value of the Euros you are buying and then just before 25th Jan 2007 you pay the further 90% and the Euros get sent to your designated destination. This is basically a buy-now-pay-later deal. You can fix the rate (1.49 in the example), know what your property will cost and you only have to put down 10% of what you buy to do it. You then pay the other 90% just before you want the money sent out. This is a ‘Forward’ contract.
 

Spot and Forward Contracts Explained

Spot Contract

This is buying currency immediately or ‘on the spot’ if you like. If you agree a Spot contract, you will have bought the currency immediately, you will then need to pay for it within 24hrs of agreeing it and the funds can be sent out for two days after you have agreed the deal (sooner in some cases). So if you have a payment due on Jan 25th 2007 you would want to do the spot deal no later than Jan 23rd so as to allow time for you to make a payment and the Euros to reach to be sent out.

Forward Contract

This is essentially a buy-now-pay-later contract which allows you to fix the rate you will get in the future, that way you can know exactly what your property will cost you.

As an example you have a payment due on 25th Jan 2007 of Euros 50,000.00

You ask for a forward contract with a value date of 25th Jan 2007 and get offered 1.4900 Euros per Pound

You agree to that contract so you know you will definitely get 1.4900 on Jan 25th, whatever the market does in the meantime. This means you know what it will cost you in Pounds

50,000.00 / 1.4900 = £33,557.00

You pay a 10% deposit immediately to secure this rate:

£33,557.00 / 10 = £3,355.70

You then pay the balance of 90% just before the value date of 25th Jan 2007:

£33,557.00 - £3,355.70 = £30,201.30

This way you have fixed a rate and can be secure in the knowledge of exactly what the Euro payment will cost in Pounds.
 

Helpful Information

Set your Limits – It’s an unusual situation when you are buying property abroad. You may have found the property you are looking for and then watch the currency rates for a good time to buy the foreign currency. It would usual in the currency market to see it move daily, the prices of your property going up and down by £thousands each day. This is where it can get tricky if you haven’t set your limits. One week it’s costing £130k, the next its £140k. You may watch it hoping it will go back to £130k but it goes the wrong way, now you are looking at £145k and still hoping it will get back to the exchange rate you first saw. Its prudent to lay out three prices when you start looking around:

Target Price, Upper Limit, Lower Limit

Target Price – what you are aiming to pay for the property
Upper Limit – the price at which you will go no higher
Lower Limit – the realistic price you’d be very happy and do the deal

Whilst it’s just common sense, having these limits in your mind can stop you getting carried away with the market and save you time, tension and cash.

Value Dates – When you speak with a currency specialist they will ask you what ‘value date’ you want. All this means is what date you want the currency delivered.

If you do a spot deal the standard ‘value date’ is two days after you agreed the deal (this allows time for you to pay for the funds etc.)

If you arrange a forward contract you can decide what the value date is. It’s prudent to choose a value date that is two or three days prior to when your funds are due to arrive with the vendor to leave time for the international transfer etc.

Information provided by GlobexFx.com
If you would like any further information do not hesitate to contact us at privateclient1@globexfx.com or 0800 035 7115