Pound surges higher against Euro and US Dollar
The Pound has surged this week, rising to €1.15 vs the Euro and above $1.30 against the US Dollar. There are 2 reasons for the gains we have seen for Sterling. The first is optimism in the markets that Theresa May will be able to make progress with Brexit talks when she meets Junker today in Brussels. There are still hopes that she can gain concessions to get the withdrawal deal through parliament, removing the chances of a ‘No Deal’ and in doing so, remove much of the uncertainty that has been keeping the Pound subdued.
The second reason is decent UK data showing the economy is performing well. Unemployment is at record lows, wage growth is rising at it’s fastest pace in 10 years, and UK retail sales figures show that consumers are still spending. The news of Honda closing its factory in the UK has not had much of an impact as it’s not believed to be due to Brexit. Global car sales are down and they have said they are restricting their manufacturing base to where they sell most of their cars.
In the light of the recent gains, in today’s post I will outline why using a broker like us when making international payments can save you thousands of Pounds.
Getting the best exchange rates for purchasing property overseas
When purchasing property overseas, you will usually pay in a foreign currency, e.g. Euros. This means that you will need to convert your Sterling and in doing so, enter the potential minefield of the currency markets.
The natural inclination is to use your bank however this is usually a very expensive way of doing it. Banks don’t usually offer particularly competitive rates, and a currency broker can achieve rates that are typically 2% to 3% better. Given a property purchase will usually involve a sizable sum to be converted, the savings can be considerable. A 2% difference in the rate when buying €300,000 will save you more than £5,000.00.
How does using a broker work?
Using a broker is straightforward. The first step is to register an account which you can do online. This shouldn’t cost you anything or obligate you in any way, and simply allows you to get a live quote to compare rates of exchange.
When purchasing a property overseas, the first step is paying a deposit. You would do this using a ‘Spot Contract’. You simply fix a rate with your broker, settle the required Sterling amount by debit card or bank transfer, and your currency is then transferred to the solicitor dealing with the sale. We don’t charge you any fees or commission, as we will be making a small profit through our margin (the difference between the rate we buy at, and the rate offered to you).
Protecting against volatility using a Forward Contract
Most purchases will have a lag time between paying the deposit and paying the completion balance, of up to 3 months. The exchange rate could change significantly in that time, so simply relying on another ‘Spot Contract’ at the time of completion could prove costly should the rate fall. Most overseas purchasers therefore opt for a ‘Forward contract’. This allows you to eliminate the risk of fluctuating exchange rates by freezing an exchange rate today for a transaction that will take place in the future.
Forwards are very popular when buying overseas, as it allows you to fix a rate on the balance due at the same time as securing your deposit, thus protecting you from unfavourable movements in the market. A 10% deposit is required to secure the contract, with the remaining 90% due when you want your currency to be transferred. You then know the cost of your property in Pounds, regardless what happens with exchange rates.
Taking a gamble
For those less risk averse that are happy to gamble on the rate moving up in their given timeframe, 2 other contracts are available: A Stop Loss order will protect you against adverse exchange rate movements and secure your currency if it falls below a pre-agreed level, giving you a worst-case scenario while still allowing you to take advantage of any gains in the rate should the market move in your favour.
A Limit order is the opposite; it is placed to secure currency at a specific price that may not be currently available. This type of contract is particularly useful when the markets are moving in a positive direction for you. If you have a target rate you are aiming for, you can place a Limit order to buy should it get there, while having a Stop Loss order in place to protect against adverse movements.
Get in touch today to find out more
Everybody’s specific requirements are of course very different, as are attitudes to risk. If you are looking to buy property overseas, or need to convert currency and want to make exchange rates work for you, you should have a free consultation with one of our foreign exchange brokers so that you can discuss all the options available, and make an informed choice about which type of contract is right for you.