Foreign Property Purchase: Currency Issues

Your overseas property purchase

Buying a property overseas, whether as a holiday, retirement or permanent home, or for investment purposes, involves a significant financially outlay. It therefore makes sense to avoid incurring unnecessary costs, which can mount up very quickly for the unwary. In order to do this, you will need to consider all aspects of your purchase in detail.

A vital consideration, and one that is often overlooked, is the foreign exchange element of the purchase. This can make a huge difference to the price in sterling that you will pay for your property.

Whether you are paying cash, taking out a mortgage in the local currency or remortgaging a property in the UK, you will need to transfer pounds sterling into the currency in which you will be making payments on your overseas property. This is where the unprepared can be caught out, often to the tune of thousands of pounds.

As with all the other aspects of property purchase abroad, it is essential to seek appropriate professional advice.

Getting the best deal

To ensure you get the best available deal when transferring money overseas, the following areas are ones to watch:

Exchange rates

Banks take a percentage on the exchange rate that they offer. This can sometimes be more than 3 per cent, depending on the currency that you require. If you are transferring thousands of pounds, this can lead to significant additional cost.

Transfer fees

Banks typically charge between £20 and £40 per transfer. Therefore, the more transfers you make through your bank, the more you will pay in transfer fees.

Receiving bank fees

Not only do UK banks charge to send your money abroad, but overseas banks often charge to receive it. These charges can often be as high as 0.3 per cent of the value of the funds received.

Exchange rate fluctuations

Exchange rates fluctuate constantly – many times a day. Fluctuations of up to 10 per cent in a relatively short space of time are common, and even larger movements do happen. If, between contracting to purchase a property and paying for it, the exchange rate moves against you by 10 per cent, the sterling price that you will pay will effectively increase by 10 per cent, which could have dramatic consequences for you.
Exchange rates fluctuate constantly – many times a day. Fluctuations of up to 10 per cent in a relatively short space of time are common, and even larger movements do happen. If, between contracting to purchase a property and paying for it, the exchange rate moves against you by 10 per cent, the sterling price that you will pay will effectively increase by 10 per cent, which could have dramatic consequences for you.

In many cases, the transmission of funds for property purchase is left to the last minute, leaving the buyer exposed to the prevailing exchange rate and increasing the total cost of the property by a considerable sum. In the “Beating exchange rate fluctuations” section of this fact sheet, we show you some ways of avoiding this.

Other costs

It does happen that money transfers go astray or take several days to reach their destination. If you have signed a contract and agreed to make payments by specific dates, you could be liable for penalty payments if you miss these dates.

Options for currency purchase

What are the options for buying currency, and how can you avoid substantial – and largely unnecessary – additional costs?

Many people choose to consult their bank, but banks’ services often lack the personal touch and may be more suited to commercial customers. A number of reputable currency specialists have come to the market over the last few years. Such firms provide a range of services that are specifically tailored to people making international money transfers, and they offer a number of important benefits.

The benefits of using a currency specialist

Currency specialists offer the following benefits to those making international money transfers:

They usually offer exchange rates that are more competitive than those typically available through the high street banks. This is because they buy and sell huge sums of currency and do not have large banking infrastructures to support. They can, therefore, be more generous with the rates that they offer, which can save you up to 3 per cent on your transfers

They typically offer reduced transfer fees and can eliminate receiving bank fees on your transfers, which can save you up to £40 per transfer plus any receiving bank fees that you would have been charged for transferring money through your bank

They can help to protect you from adverse currency movements and enable you to take advantage of any exchange rate movements that are in your favour. This can be done even if your funds are not available or you do not need to make a transfer at the particular time when the favourable exchange rate movement occurs. There’s more about this in our next section.

Beating exchange rate fluctuations

Spot transactions

If you have all the necessary funds already available to purchase your property abroad, one option to protect yourself from currency fluctuations is to arrange what is called a spot transaction, or spot contract. This is pretty well instant (within two working days), and secures your funds in line with the exchange rate at the time at which the transaction takes place. They can then be transferred to the vendor or estate agent in due course, as required.

Forward transactions

If you do not have the funds immediately available to buy currency on a spot transaction, you can benefit from a type of ‘buy now, pay later’ arrangement known as a forward transaction, or forward contract, whereby you fix the exchange rate at the current level for an agreed completion date up to 12 months in the future. To do this, you must have access to a minimum of 10 per cent of the funds initially, to use as a deposit. You then pay the balance as stipulated in the contract.

The benefit of using a forward transaction is that the price is agreed now, so you know exactly how much you will be paying, but you do not have to part with the entire sum until closer to the date when your property purchase is completed. This is good for your cash flow.

Regular payments

As more and more people take out currency mortgages on overseas property, there is an increasing need to make regular overseas payments – typically, mortgage payments or pension transfer payments.

These payments, by their nature, are smaller than the outlay required for the initial property purchase, but the costs can soon add up unless you shop around.

Currency specialists typically offer a regular payment service, which will be cost-effective for you, as exchange rates will be competitive and transfer fees low. The savings to you could total more than £500 per annum if you make your regular transfers through a specialist rather than through your bank.

What is more, most regular payment services offer a direct debit facility, so you can avoid the hassle of having to arrange each payment individually. Once a plan is set up, it is usually ‘good until cancelled’ – that is, your payments will be made automatically unless you cancel the plan or your direct debit.

Choosing a currency specialist

There are many specialist currency firms in the market, which is good news for customers, as competition helps to ensure competitive rates of exchange and a high standard of customer service.

In selecting a company, you should consider the following:

Has it been established for some time and therefore gained the relevant market experience?

Is its financial information and background transparent and easily accessible? For example, does it publish its annual report online?

Does it have any quality standard accreditations, such as ISO?

Does it offer extended office opening hours, to enable you to conduct your business at a time convenient to you?

In conclusion

To make the purchase of your overseas property as straightforward as possible and avoid incurring unnecessary costs, you should do your homework and consider all the legal and financial issues before you sign anything.

Making regular payments on an overseas property can add substantially to the costs of your purchase, yet the majority of these costs can be eliminated with a bit of planning. Never has the saying ‘it pays to shop around’ been more relevant, so make sure that you do.

Finance can be a complex subject. Don’t be afraid to ask questions, and insist that the answers are given in straightforward, jargon-free language.

Many people get caught out unnecessarily. Don't be one of them!