Currency Forward Contracts and Buying Property Overseas
What is a currency forward contract?
If you want to hedge your currency exposure, a currency
forward contract is one of the simplest and most accessible ways to do so.
In simple terms a currency forward contract is an agreement
between the client and international payment provider (Currency Online Group) to fix a
currency exchange rate for a future overseas payment.
It is most common to use a forward contract for a payment
due up to 12 months in advance but this can be done for a period of up to 2
years. To lock the rate in a deposit of between 5-10% will be required
depending how far in advance the contract needs to be.
Advantages of undertaking a currency forward contract
Setting a forward currency contract allows businesses/individuals
to be certain of costs around an international payment when budgeting future
In turn this mitigates currency risk and protects the
company’s bottom line profit or in the case of an individual purchase, the cost
of the transaction. With outside factors affecting the currency market daily,
fixing a contract eradicates the risk of volatility and allows you to devise a
clear financial plan around your overseas payment(s).
With the future exchange rate locked in it means the price
of the contract cannot change for the given date. This means the rate can move
resulting in a favourable gain for the client.
Examples of why you would use a forward contract:
Forward contracts can prove particularly useful if you have
a transaction coming up that needs to be made overseas and is of sizeable value,
- Overseas property purchase
- Overseas property maintenance
- Relocation to another country
- Regular or phased payments over time (transfer of salary or
Using a forward contract for an overseas property
buying a property in the UK, obtaining a dwelling overseas does not happen
overnight. The process can take some time to complete, especially at this
present time as we continue to live through the Covid-19 pandemic.
When buying a property overseas, the purchaser(s) will be
working within a budget that they will need to stick to, just like buying back
home. However, one major difference between the two scenarios is the potential for
fluctuations in exchange rates that will need to be dealt with, over the period
of time it takes for the sale to go through, when acquiring property abroad.
Taking out these risks means the consumer has piece of mind that costs will not
unexpectedly increase due to not accounting for these prospective currency
movements. If this was to happen, suddenly the property could become
unaffordable, with sleepless nights ahead. Forward contracts can ensure
complete control of costs and budget when it comes to knowing how much the cost
of the transaction will be by setting the exchange rate for a particular date.
To secure a property overseas a pre-contract, non-refundable
deposit is usually required with the remaining balance due once all the
legalities are complete. In the case of a new build, completion will be due the
home is finally ready to move in. If there are hold ups in the time it takes
for the build to complete, this could mean further movements in the exchange
rate in that time, that could go against the purchaser.
Let’s say for example you are due to pay the balance on a
property purchase 6 months from now of €450,000. If you buy the currency forward
contract today (as of August 3rd 2021) at a rate of 1.166, you would
be required to pay a 5% deposit (€22,500), with the remainder being paid
before the end of the contract. In setting this exchange rate you know that the
remaining 95% of the deal will cost £366,638. If you decided not to use a
forward contract, come the day of completion you would make the international
payment using what is known as the spot rate (rate on the day). If in that time
the Euro had strengthened and the exchange rate had dropped to say 1.12 the
remaining balance due would cost £381,696. That is an increase of £15,058. You
can see from this illustration as to why it is important to protect yourself
from this kind of volatility and why forward contracts are a sensible approach
when it comes to buying property overseas.
Our partnership with Expert Villas
We have teamed up with a leader in the property sector in
Spain and beyond to provide our first-class international payment service to
all of their clients. Expert Villas
currently has over 80,000 properties listed on their website from all major
estate agents in Spain and the Islands. In addition to this Expert Villas has built up a
business directory providing complete assistance when it comes to buying,
selling and moving overseas.
With our expert knowledge of all things, currency, and Expert
Villas in all things property you are sure to benefit all round when it comes
to buying, selling or renting an overseas property in Spain.
How to arrange and agree a currency forward contract with
Currency Online Group
If you feel a currency forward contract is best suited to
your overseas property purchase, then the process could not be simpler. The
first thing is to open an account with Currency Online Group.
You can either follow the link www.currencyonlinegroup.com/international-payment
or if you would prefer some assistance, you can contact our professional
International Payments Team on 0208 050 1546
A dedicated account manager will guide you through the
process and discuss what the best option is in regards to your forward contract
and fixing the exchange rate, based on your circumstance. While forward
contracts prove highly popular when it comes to overseas property purchase,
there are other FX solutions available that the team would be happy to go
through at the same time.
Benefits of making your international payments with Currency
- Bank beating exchange rates
- Dedicated team providing a personalised service
- Access to online platform 24/7
© Currency Online Group
3rd August 2021