Watch those currency exchange rates
The Observer, 4 June 2006
By Sally McCrone
While the lower cost of almost everything from property to petrol attracts the British buyer to sunnier climes, it is all-too easy to get burnt by the currency transactions.
Raising the money to buy a home through the sale or remortgage of a UK property may be relatively simple for the savvy British homeowner, but dealing with currency exchange other than for small amounts of holiday spending money is less familiar territory. Get the timing wrong on a currency transaction and the price of that bargain home can shoot up faster than a whole year's house price inflation in the UK.
Homebuyers who are meticulous about getting the best mortgage rates when buying a property in the UK seem to lose their diligence glasses before buying abroad, according to foreign exchange businesses. All currencies fluctuate. The Australian and New Zealand dollars can fluctuate by 10 per cent a month, according to foreign exchange (forex) specialist HiFX. Even the euro can move by 2-3 per cent.
HiFX says that it usually takes between six and eight weeks to complete a property purchase abroad and that even over one month the currency movements can have a dramatic effect on the final price. Mark Bodega, marketing director for HiFX, says: 'In December 2005 the value of the euro increased by 3 per cent against the pound. This would equate to a loss of euros 6,000 [pounds 4,000] on a typical euros 200,000 [pounds 135,000] property in Spain.'
Suzanne Sullivan, marketing manager for Currencies Direct, says its research suggests that buyers of foreign proper ties have collectively lost euros 1bn by not taking care over the exchange rate.
Forex companies encourage buyers to think ahead about the exchange issue so that they know how much they can really afford to spend on their dream home. They also recommend that buyers shop around before automatically using their own bank to do the transaction. Sullivan says: 'The rate you are likely to get from your bank is the same as if you were buying holiday money. Forex specialists offer commercial rates to private individuals.'
The least risky way to exchange the money is if the full amount can be exchanged straight away (called a 'spot transaction') and is kept in a euro account (or other relevant currency) until it is needed. Property buyers need to weigh up what might be lost in interest over the period as euro base rates are 2.5 per cent compared with the UK's 4.5 per cent, for example.
Buyers who do not have or do not need all the money up front because they have chosen to buy a new property 'off plan' and need to make staggered payments to the developer, can use a forex service to fix the exchange rate for 18 months to two years. This is called a 'forward transaction'. You pay a deposit, usually 10 per cent up-front, and the rest when the contract expires. 'This means buyers know exactly what they are paying for the property,' says Sullivan.
The drawback is that buyers also miss out if the exchange rate goes in their favour. But, says Sullivan, 'Since there is no way of knowing which way it will go, fixing gives you peace of mind.' Purchasers with more time or who need to make staggered payments might prefer the fixed exchange rate option.
Consumers should be aware that foreign exchange services are not regulated and the forex companies and banks cannot give you advice. They can give you information but it is then up to you to decide what is best for your situation.