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Movements in global markets pose a significant risk when purchasing a property overseas.
Obviously, there is little you can do about swings in the markets and resulting exposure to changes in foreign exchange rates. However, there are ways you can manage and mitigate risk.
The best way to circumnavigate the risk of fluctuating exchange rates is to move quickly and decisively. If you are purchasing a UK property, however, you may be entering into a protracted affair. So what can foreign property buyers do to limit their foreign exchange risk and what facilities can you use to ensure that you are protected at all times?
Locking in an exchange rate can help you when you buy or sell property. As an example of how changes in foreign exchange rates can affect you, if you bought a €500,000 property as a UK resident in February 2020, it would cost you nearly €17,500 more by April, just a few weeks later. As you finalised the smaller details of the sale, the cost of the purchase would proportionally increase as the pound devalued and arranging funding could have become unpredictable. Locking in the rate at the point of sale without impacting your cash flow would protect you against adverse changes of this nature. It would also allow for future planning with greater clarity.
A simple approach to mitigating foreign exchange risk is to take advantage of a ‘Vanilla Forward Contract’ (forward contract), which effectively allows you to lock in a future exchange rate. By doing so, you are protected against any major changes in foreign exchange rates.
For example, if you were funding a purchase in cash, you would execute a forward contract at the moment you sign the contract for the property. You are able to choose a value date that suits the sales cycle of your property purchase - six months is a common duration. Any payments can be delivered at the fixed rate within your chosen duration without having to settle the contract upfront.
Every time a cost milestone arrives, i.e. you need to pay the deposit, you can simply use your forward contract. You send your provider the corresponding amount in your own currency, which will be converted into the required foreign currency, utilising the previously agreed exchange rate. The foreign currency can be paid to you so you can make payments for the property directly, or it can be paid to a third party on your behalf.
A forward will allow you to buy the currency that you need, for a determined point in the future, and then over that time frame, you settle the contract in part or in full, ultimately providing the buyer flexibility and security that they have a specific, protected rate, regardless of how the market moves.
From monthly mortgage costs to local taxes and services charges, properties typically require ongoing maintenance and servicing costs. It can be challenging to forecast and manage these payments. However, you can use a long-dated forward contract (for up to five years), allowing you to frequently utilise the contract in order to make these payments at a fixed exchange rate, giving you cost certainty.
Foreign exchange rates should also be considered if you are thinking about selling an international property. Long-dated forwards give you the opportunity to protect the value of your property in a future sale. Again, using a long-dated forward contract, you can lock in the exchange rate for the value of your home for up to 5 years into the future. This doesn’t have to be done at the time of purchase and means that if you own a property that you are looking to sell in the future, you could well benefit from locking in an exchange rate at a moment that is beneficial to you.
Ensuring that you know the processes of your provider is imperative. Purchasing properties anywhere comes with definitive deadlines which need to be met. By being aware of how long it takes to settle trades and what paperwork is required will make for a smooth process and an easier close of the sale.
Thanks to Hamilton Court FX, for the guest article
For more information, download the ''How to Buy and Finance Luxury Property in London'' guide