In an uncertain world, there are few things harder to guess than foreign currency movements. Yet as the owner of a property abroad you will have to get involved with exchange rates, even if it is only for minor money transfers from the UK. If you also have a mortgage in a currency other than sterling you will have to think long and hard about the best way to manage the risk of variable exchange rates.
Exchange rates change on an hourly basis, so buying a property with a foreign currency mortgage means that you are effectively buying without knowing exactly how much you will end up paying, something that few of us do in any other area of our lives.
Most overseas buyers will open an account in the local currency and transfer money in as required. If you have a mortgage to service, you can arrange for regular monthly transfers from a UK account or you can transfer a lump sum every few months. Either way, you will have to keep an eye on those notoriously volatile exchange rates.
Detailed market knowledge is an important starting point for anyone dealing with currency markets. You will need to learn about the economy in your chosen country. Look at whether there is a pattern of boom and bust or has the economy steadily grown? Switzerland, for example, has had unspectacular growth rates, averaging a constant 2% to 3% over the past 10 years.
The foreign exchange market is affected by many factors such as unemployment, interest rate fluctuations, political unrest and major world events. Rather than trying to predict an uncertain future, currency specialists recommend that you spread the risk. Don’t buy all the currency that you require at any one time or leave it all to buy just before you will need it but rather hedge against future changes.
There are two main ways to do this. First, if you are risk-averse and prefer to play safe, currency specialists let you buy your foreign currency in advance for payments up to 24 months ahead. This means that you can be sure what the costs will be in pounds sterling without worrying about potential fluctuations. This is called a forward contract. As well as managing the risk, it also helps your cash flow as you only pay around 10% of the money required up-front.
The downside of a forward contract is that should the currency weaken in that period, you will end up effectively out of pocket because you are fixed into the higher rate.
Another option is to use a limit order. Currency dealers will let you place an order in the market at a level of your choice. This way the currency will be bought for you once that rate is reached. For this, you will need to have the money in advance. Combining a limit order with a stop loss order – a minimum level at which currency is bought – means that you can effectively set upper and lower exchange rates.
If despite this advice, the risks seem too large, there is some good news to end on. If you buy a property abroad and the pound rises in value against the currency your mortgage is in, you will be able to buy more of that currency with the same amount of pounds. This means that you would require fewer pounds to pay off the monthly mortgage payment or, if you want to be free of the debt, you could pay off your mortgage faster.
As the owner of a house abroad you will need to take a position on what rates are going to do. So read extensively, follow the markets and most of all, consider getting professional advice from respected and accredited advisers. They often charge no transfer fees or commission for sending your money abroad, relying on competitive rates to make their money.
Cathy Hawker is a freelance property writer who contributes regularly to The Evening Standard and BBC Good Homes Magazine.
The content provided in the Primelocation.com guides is for information only. In all cases, independent and professional advice should be sought before buying, selling, letting or renting property, or buying financial services products.