Currency can seem a complicated part of the overseas property buying process. Much of that is down to inexperience – few of us buy a home abroad very often – combined with a perfectly natural concern when a large amount of money is involved.
Currency can actually be one of the simpler parts of property buying, however, so long as you adopt a “safety first” approach to your currency transactions. Here are the basics of the process and the things you need to know as we head into 2018.
1. Trading
The word “trader” when it comes to financial arrangements may make you fearful that you’ll be dealing with City traders shouting at each other over computer screens! This could not be further from the truth. However, if you have pounds and you are buying a property in euros or dollars, you do have to trade. Your trader is simply the man or woman who will get you the safest deal to ensure you can buy your home. At a company like Smart, with a five star rating on Trustpilot, we only benefit from your successful transaction.
Your trader is the man or woman who will get you the safest deal to ensure you can buy your home.
If you’re purchasing a property abroad, you should speak to a currency and payments specialist about transferring your currency overseas.
2. Currency regulation
Currency companies are regulated by the Financial Conduct Authority (FCA) and are safe to deal with. At Smart, your money is always kept in a third party institution. We use Barclays or the Bank of Ireland.
3. Currency pairs
The two currencies you will be trading are known as a currency pair. It could be pounds and euros, in which case the pair may be expressed as GBP/EUR, or Australian into US dollars (AUD/USD), South African rand into New Zealand dollars (ZAR/NZD) and so on. All currencies have a three letter code usually based on the country and the first letter of the currency.
4. Interbank rate
The rate you see on the news and on apps is the “interbank rate” that large financial institutions trade with each other. Everyday customers and property buyers won’t quite get that rate anywhere, but a percentage point or two below it.
5. Rates change by the minute
Exchange rates change by the minute throughout the working week. The Asian and western Pacific currency markets open first, then when they are clocking off the European currency traders get to work, then the American, and back to Asia. The weekends are normally quiet.
6. Politics affects rates
Currency traders buy and sell in response to political events, such as elections and referendums – as we saw in the UK after the EU referendum when the pound sank to its lowest level since 1985. Anything that suggests political uncertainty – even a US President’s tweets – can dent that country’s currency. Stable governments tend to have strong currencies, which was why the success of separatist politicians in elections in Catalonia just before Christmas damaged the euro, Spain’s currency.
7. Potential 2018 game changers
This time two years ago few of us predicted Brexit (which weakened the pound severely) or President Trump (apparently good for the pound). A year ago, traders were worried about Far Right politicians being elected in France and Holland, which didn’t happen, but few predicted the Spanish/Catalonia constitutional crisis or the UK election debacle for Theresa May. Looking ahead, there are plenty of other potential political and economic events that could hit the value of your pounds, including political uncertainty in Germany, threats around North Korea, Brexit negotiations and the UK economy, and the survival – or not – of Theresa May as PM.
8. The joys of spring
Curiously, seasons can affect currencies too. Historically the pound tends to rally against both the US dollar and euro in the spring. No-one has explained why, so traders are reluctant to rely on it.
9. Economics affects rates
It is really economics that has the greatest affect on currency. Large financial institutions want to put their money where it will get a better economic return so they buy the currency of a country that looks prosperous. The laws of supply and demand mean that if people want to buy that currency then the price goes up. So if the Eurozone economy looks good, the value of the euro goes up and you’ll get few euros for your pounds, and vice versa.
10. Data releases
Traders learn which countries are looking strong or weak from economic data that is released every day. They have come to trust some data more than other, so news that may seem quite obscure will nevertheless be seized upon and will affect currencies. Look out in particular for “US non-farm payrolls”, which is essentially what Americans are earning and thus likely to spend, or the “German Purchasing Managers’ Index (PMI)” which predicts how the eurozone’s largest economy is doing. In the UK, consumer confidence as established by the Nationwide Consumer Confidence Index (NCCI) can be a good judge of how the economy is “feeling.” If you read our regular news and articles you will soon learn to see what affects currency.
11. Gross Domestic Product (GDP)
One of the most important bits of data is how well the overall economy of a country is doing, and that is expressed each month in the GDP figure. A rapidly increasing GDP will strengthen a currency considerably. The Balance of Payments, which monitors how the UK is interacting with the rest of the world, is also crucial.
It is really economics that has the greatest affect on currency.
12. Interest rates
The monthly decisions on interest rates made by each country’s central bank are one of the most critical factors in deciding the value of a currency. In the UK it is the Bank of England’s Monetary Policy Committee (MPC) that sets interest rates, and there is an equivalent in the European Central Bank (ECB), the US Federal Reserve and every other currency zone. Traders will look for any indication that interest rates are rising and falling, so if you suddenly see the pound rising, it could just be a hint from one member of the MPC that interest rates might soon rise – interest rates are like a hair trigger on exchange rates.
On 16th October 2017 the pound was worth less than €1.11 but just two weeks later it was worth nearly €1.145. That translates into a €200,000 property changing in price by £5,000 in two weeks. That was all down to interest rates.
For advice on protecting your property buying budget from changing exchange rates, read the Property Buyer’s Guide to Currency.
13. Risks of changing currencies
If you were in the buying process abroad – which can easily take months – while something that seriously affects currency occurs, like an interest rate change, you could end up having to pay thousands more for your property abroad. If you don’t have the cash and have to pull out, you could lose your deposit. That is what we mean when we refer to protecting yourself from currency risk.
14. Protecting yourself
If you plan ahead, you do not just have to take the exchange rate that happens to be there when you pay for the property. There are a range of different options.
15. Spot Contract
If you need to make your transfer now, you can benefit from exchanging your currency at the live exchange rate at the time that you want to pay. Booking this rate now means you are protected from further exchange rate fluctuations but you do have to pay up front.
16. Forward Contract
If your transfer is planned for some date in the future, such as a scheduled date for completion, you can secure your exchange rate now to protect yourself from any adverse fluctuations. This also allows you to plan your budget with price certainty, as you will know exactly what exchange rate you will receive on your future transfer. A Forward Contract is ideal for anyone who is required to pay a deposit now, but knows they will have to wait weeks to complete. It secures their exchange rate for up to a year, on payment of a deposit, protecting the value of their property from any fluctuations before they complete.
17. Regular Payments Plan
If you need to send funds overseas on an ongoing basis, setting up a Regular Payments Plan can save you both time and money on every transfer. You can also lock in the exchange rate with a forward contract to ensure that you always know how much you are sending and receiving every time.
18. Waiting can be a false economy
We know that a significant minority of people who would like to buy a property abroad (and have the money) are delaying because they hope that the pound will strengthen. But the evidence is that this might be a false economy. Spain, Portugal, France, Ireland and the USA are all seeing prices rising fast at the start of 2018. By the time the pound improves, if it ever does, prices may have risen and gone out of your reach.
