How Fluctuating Exchange Rates Can Affect The Price Of An Overseas Property
The foreign currency market is the largest and most traded financial market in the world, with more than $6 trillion traded each day, and over 80% of the foreign currency trading is for speculation purposes. The main drivers that influence exchange rate movements are economic and geo-political events, and technical trading by investment banks. These factors can, and do, create significant currency risk which can dramatically affect the price of your overseas property.
As an example, if a UK resident is purchasing a property in Spain and that property is valued at €500,000, then a 1% currency exchange movement between the Pound and the Euro constitutes a €5,000 shift.
For those who find themselves able to retire in the sun, they will typically choose to purchase an overseas property. Popular destinations include Spain, Portugal, France, Italy, Greece, Australia, and the US.
Depending on the property type, there will usually be a payable deposit (typically 10% of the property price) and a final purchase payment. Alternatively, if the property is purchased off-plan, there will normally be a need to transfer ever-increasing amounts as the project nears completion.
Whichever property is purchased, there will be a period of time between paying the deposit and the final payment. If there are significant economic or geo-political events during this time, you could find that the costs of the property suddenly start to spiral out of control.
To protect against negative exchange rate movements, it’s important to speak to a currency exchange specialist to put in place a solid strategy that mitigates currency exchange rate risk.
Examples of risk management:
Limit/stop loss orders
A limit order will help target a specific “best-case scenario” exchange rate. A stop-loss order will help target a specific “worse-case scenario” exchange rate. The orders can be placed in the currency market and will automatically execute if one of the rates becomes available, even if it’s 3am and you are fast asleep!
Forward contract
A forward contract is an agreement to buy a certain amount of currency at an agreed exchange rate in the future. It allows you to take control of your budget by protecting you from losses due to negative exchange rate fluctuations.
Example
If you had agreed to purchase a Spanish property for €150,000 in December 2022, when the exchange rate was GBP/EUR 1.1676, you would have calculated the cost of the property at £128,468. However, when the sale was completed in February 2023, the exchange rate had dropped to GBP/EUR 1.1150. The property would now cost you £134,529 which is an increase of £6,061! If you had used a forward contract when the sale was agreed, you would have protected yourself from the adverse exchange rate movement.
At Regency FX, our priority is to provide you with a premium service that is tailored to meet your individual requirements. Your personal account manager will guide you through our range of services and recommend trading options that are best suited for your needs. When deciding on a trading option, there are various factors to consider, such as the time frame, value, and currencies required. Our specialist service will ensure that your account manager tailors our product offering to meet your specific needs. You can also watch the market and transfer funds 24/7 using our state-of-the-art client portal. Regency FX offers: no hidden fees, 5-star consumer ratings, bank-beating exchange rates, Safe, simple, and secure.
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