For many people who buy homes overseas , the main issue is actually finding a house, with many under the impressions that once the deal is agreed then that is it - wrong.  One of many factors to consider when buying property overseas is the exchange of your local currency to that of the country where you are buying the property.  If you are lucky enough to both be dealing in Euro’s then it is a little simpler, however if you are from the UK for example, and deal in sterling, it can be a lot more complicated.  Do your homework, or may learn a very expensive lesson you will never forget!

 

 

The first vital phase of any overseas property related transaction is valuing the selling price in your local currency, and deciding if you can actually afford the investment.  You should also bear in mind that currency rates do fluctuate, and while the band is not often too volatile over the short term, this does not always bear true.  For example, the rate of sterling to the US dollar has moved from 1.80 US dollars to the pound, to 2.05 over the last few months. 

It may not sound much, but if a US investor were buying a UK property for £1,000,000, the 10% plus fluctuation would add over $200,000 to the asking price, if the exchange rates moved as detailed above between agreeing the deal and sorting out payment - an extreme example  maybe, but a lesson for those who rush in.

As well as the actual risk of the exchange rate moving, there is also the actual cost of making regular payments in a different currency, the cost of converting and the often high cost of transferring overseas.  Many people make the mistake of using their local bank to get involved in currency transaction, despite the fact that there are numerous experts and cheaper companies out there.  The traditional banking sectors throughout the world tend to make large profits from selling more obscure services to their customers, because the customers are often afraid to go elsewhere.  Investigate the market and you will find many currency experts who will :-

• Deal at better exchange rates than traditional banks.
• Often deal at substantially reduced charges.
• Not charge monthly fees if your account stays in credit by a set amount.
• Deliver your payments overseas within the normal 10 day turn around of traditional banks.

These are points which may sound very small on the surface, can actually have a major impact in the long term. Imagine a monthly charge of £20 a month to run your currency account, that is £240 a year, or losing out by a few percentage points on the exchange rate for your monthly payments, which again can add up to a substantial amount.

How can you take more control when converting your payments into a different currency?

There are many ways of buying currency, which include :-

• Buying at the spot rate.  This is the exchange rate for immediate delivery by your bank - the rate at the second you trade.
• Forward contract.  This is the rate which you can trade at for the future, with many operators allowing you to forward buy up to 2 years in advance.  This allows you to budget your payments for the future, trading at an exchange rate you know now, rather than having to wait and see what happens.  When buying forward you will normally buy an “option”, which only requires a part payment of the overall amount.  If it is the best action for you when the option ends, you can then convert your currency in the future.
• Limit order.  This allows you to pass instructions to a trader, who will then monitor the markets for you, and buy your currency when it hits your limit.  They tend to deal on spot rates, but can also forward deal as mentioned above.
• Stop Loss.  This stop loss option allows some variation for the investor, allowing them to leave their positions unfilled until a bottom level is hit, at which point they are happy to crystallise their position.  This is often used to take advantage of a strong local rate, which allows the investor to buy more of the overseas currency.

How do you actual transfer foreign currency?

The first thing you will need when dealing in foreign currencies is an account in the particular currency you are looking to exchange into.  This allows the quick transfer of funds from your normal account to the currency account - the more time between starting and ending the process, the more chance of the currency moving, and entering the realms of the unknown.

It can often take a few days to set up a foreign currency account as the financial institution involved will likely need to run ID checks against you - do not leave it until the last minute, and ensure you give yourself plenty of time.

The majority of people who move overseas to buy a property will still have to take out a mortgage to be able to afford the investment.  The regular mortgage payments will all be subject to some form of currency rate movement, which can vary the payments required quite substantially over time.  It is essential that you put down as much as you can afford as a deposit, thereby reducing the mortgage element, and therefore reducing the risk of adverse currency movements.

For those who can afford to pay for an overseas investment in full, they are in a very beneficial position because they are able to crystallise the currency risk there and then, and not allow it to drag on for the length of a mortgage.

Conclusion

Buying a property overseas will always have a variety of risk factors included, from knowing the local market, to the currency risk. While many people tend to focus on the purchase side, it should also be noted that currency rates can effect the price you may get for your investment in the future.  Many people have fallen into the trap of investing in smaller countries which are seeing double digit local currency house price increases, only to find that the local currency continually weakens against their home currency, thereby reducing the overall return when converted back.

There are many factors to consider, and anyone investing overseas would be well advised to take professional advice with regards to currency risk, etc.  The less chances you take, the more chance of being successful.