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 expenses.

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, such as:

• Overseas property purchase

• Overseas property maintenance

• Overseas wedding

• Relocation to another country

• Regular or phased payments over time (transfer of salary or wages)

Using a forward contract for an overseas property purchase

 Just like 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 3^rd 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 Online Group:

• No Fees or Charges

• Fully FCA Authorised

• Bank beating exchange rates

• Dedicated team providing a personalised service

• Access to online platform 24/7

© Currency Online Group

3^rd August 2021