Protecting yourself from exchange rate movements
There are many different ways to diversify your property portfolio one of which is to look at overseas markets which can move in different directions to your domestic market. Very often, but not always, a foreign property investment will require exchange rate transactions which can bring about their own challenges. There are ways and means of protecting yourself from exchange rate movements and maximising your overseas assets.
LIVING WITHIN YOUR MEANS
Whether you are looking to acquire an overseas property for investment purposes, personal use or you are looking to move lock stock and barrel to a country such as Spain, it is vital that you live within your means. Many people make the mistake of stretching your finances when looking for their dream property only for unforeseen financial issues to have a major impact in the future. So, it is vital that when setting your budget you factor in what you can comfortably afford.
If we look at the countries such as Spain you might be surprised to learn that taxes and additional expenses could increase the purchase price of a property by anywhere between 10% and 15%. If you are spending for example €200,000 on a property this is a significant additional expense. This is why we recommend giving yourself some “headroom” when working out what you can afford and what you plan to spend.
WHAT HAPPENS WHEN YOU AGREE THE PRICE?
It goes without saying that you should already have a mortgage in place, at least in principle, before you begin talking about purchase prices. If you manage to find a property which is within your financial means, suits your requirements and you are able to agree an acceptable price, you need to act fast. If you have sufficient euro deposits, in the case of Spain, then a cash payment in the local currency would not bring about any exchange rate complications. However, if your finances are in sterling then you will need to exchange them into euros at some point.
The problem is that once you agree a price and the deal begins to progress there is still no guarantee it will be completed. However, as you have calculated your offer using the current exchange rate, in this instance between sterling and euros, you should look at locking in that rate. There are companies who will arrange this lock in agreement which effectively gives you the option to exchange from sterling into euros at a prearranged rate for anywhere up to a year. There will obviously be a small cost to this option but when you bear in mind the 20% swing in sterling after the Brexit vote it is minimal.
CLOSING THE DEAL OR NOT
If your overseas purchase goes ahead then you simply utilise your currency exchange option and pay for the property in euros. If for some reason the property purchase does not go ahead then, assuming no other suitable property has been found, you can simply retain your funds in sterling and advise your mortgage company you will not be taking up their offer at this moment in time.
In years gone by currencies tended to swing within relatively small trading ranges but we saw a significant move in sterling against the dollar and other major currencies last year. In effect sterling was devalued by 20% against the dollar with similar reductions against the likes of the euro and other leading currencies. In theory, if you had agreed to buy a property in Spain one day prior to the Brexit vote and chosen not to lock in the exchange rate you would literally have been 20% on the wrong side only two days later. When you bear in mind you are investing tens if not hundreds of thousands of euros can you imagine waking up to that in the morning?