Protecting your budget against the foreign exchange market

By Martin Steencamp, 27 March 2006

Buying a property abroad will usually involve transferring a large amount of currency from your home country into foreign currency for the settlement of the purchase cost. You will also probably have a budgeted house price in mind that you are able to afford. When it comes to buying a home in a foreign country it is surprising that currency is often given very little consideration. It isn’t as important as the location or price of the property, but it will certainly be important if you are trying to stick to a budget.

Consider for example the purchase of a property in Portugal for €180,000 with the completion date in a month’s time. If the British pound/euro exchange rate at the beginning of the month was €1.4755 to the pound, you would be looking at a sterling cost of £121,993 for the property. If the exchange rate were to fall by 2% in the month before completion to a rate of €1.4460 to the pound, you would now be looking at a sterling cost of £124,481 for the property. A loss of £2,488 – money that could surely be put to better use.

The use of some basic currency market tools could help you avoid the situation described above. Most currency brokers can offer you a simple forward contract, one of the most useful currency tools available to property buyers who have to make completion payments at some time in the future. A forward contract lets you secure an exchange rate for a payment to be made in the future. If we return to the example above, the buyer would have been able to lock into an exchange rate of €1.4755 at the beginning of the month and would have lost nothing on the completion date. Forward contracts are also useful because you only need to pay for the currency when the forward contract expires. You will have to pay a small deposit when you book the contract, but the bulk of your cash will be able to sit in your bank account earning interest.

Using a currency broker is also highly recommended. They are experts in the currency markets and will be able to offer you valuable information about them, enabling you to make better informed decisions. Brokers also offer better currency exchange rates than high street banks. They trade large volumes of currency with investment banks so are able to buy their currency at much better rates than are available to individuals. The cost savings are passed on to customers.