Currency movements are an important, yet often overlooked, factor when buying a property abroad.
Millions of people will be heading abroad this summer, but for some it will also be a chance to spend time where they want to buy a property. Warmer weather and a laid-back lifestyle make places such as France, Spain and Portugal popular spots for holiday homes, while low-cost airlines and frequent flights have made travelling to some destinations much easier.
However, there’s a lot to think about before buying a foreign property and it can be easy to overlook a vital detail when juggling other considerations. To begin with, you need to understand exactly what you’re looking for, including the particular type of property, the region you want to live in and your budget.
You’ll also need to consider all the taxes you will be required to pay. Taxes on property frequently change, as they have in France, and obligations can go far beyond what you might expect. Factor-in an unfamiliar legal system and a potential language barrier, and things can get even more opaque.
Then there’s the question of Brexit. The UK’s departure from the EU doesn’t just have the potential to bring an end to free movement, but also forces would-be owners of foreign property to think carefully about possible swings in the value of sterling.
Indeed, currency movements are an important, yet often overlooked, factor when buying a property abroad. Exchange rates between two currencies can change in a matter of minutes, and these fluctuations can make a huge difference to the amount you can end up paying.
Thankfully, there are ways to alleviate the risk. One of the most effective and easiest is through a ‘forward contract’. A forward contract allows you to lock in today’s exchange rate for up to two years, meaning you can be sure what the costs will be in pounds sterling without worrying about potential fluctuations.
“The aim is to protect your financial position and prevent you making large losses,” says Paul Emery, Head of Client Banking at St. James’s Place.
“Being able to fix a rate means that you’ll know exactly how much your purchase is going to set you back, no matter how long it takes to see it through from initial offer to completion and regardless of what the exchange rate does.”
One drawback is that if the market moves in your favour after you have established the contract, you will be unable to benefit from the upside. Nevertheless, Emery says an increasing number of people who buy properties overseas choose forward contracts because they want peace of mind.
“It removes the element of risk, which can be vitally important for those buying a home in a foreign currency,” he says.
Forward contracts are mainly used by people wanting to move large sums of money for big purchases. However, a series of smaller contracts can be used when individuals need to make periodic foreign currency payments – to service a mortgage for example.
They can also be useful when you receive an income in a different currency. For instance, if you move abroad and receive a pension in sterling, a forward contract means you know in advance how much you will receive.
Likewise, those selling a foreign property, liquidating overseas assets or moving home after time spent living abroad, would be wise to consider the impact of currency movements when repatriating funds.
"Clients who are looking to move money between currencies and across borders should consider speaking to their St. James’s Place Partner. The Partner can guide them through their options and, if necessary, facilitate an introduction to a specialist currency broker,” says Emery.
"Currency brokers offer not only more flexibility and a better level of customer service than most high street banks, but their exchange rates are also more competitive."
"Similarly, if a client needs help finding finance for their property abroad, their Partner may be able to put them in touch with a specialist mortgage lender who could help to secure a better rate."
The home on which the mortgage is secured may be repossessed if the mortgage borrowers do not keep up repayments on the mortgage.
If the mortgage is in a currency other than sterling, changes in the exchange rate may increase the overall amount of the mortgage.
The levels and bases of taxation, and reliefs from taxation, can change at any time.