Agreeing to buy a property at one price and paying for it a month later is like flipping a coin. You stand at least a 50:50 chance of losing money on your currency. But can you guess on how many occasions you would have had to stump an extra £10,000 for a mid-range property on completion day? We’ve crunched the numbers and we really don’t recommend leaving your currency to chance!
Last week the pound shot up to €1.15 and $1.41. Great news for anyone heading abroad on a property viewing trip this spring. Or is it? A positive currency movement can be a bit of a bear trap if it leads you to make an offer without locking in your exchange rate. The wild optimism that comes with a strengthening pound and cheaper overseas property is bad news unless you prepare for the rate to readjust itself.
Just over the past few days we saw the pound drop by over 1%. That means that a property costing £200,000 rose in price by over £2,000.
If you see a property abroad on your spring viewing trip and make an offer at the current exchange rate, you may be wondering what the chance is of the pound dropping significantly in value by the time you come to pay for it.
We wondered the same thing. So we crunched the numbers for the past two years running up to last weekend. We imagined a client had committed to a purchase in euros on that day. It might be a property purchase abroad, or a car, yacht, holiday or investment. Then we assumed that our client changes his pounds into euros to pay for it a month later. That’s a pretty typical timescale.
On how many occasions would the pound have weakened by a significant amount – say, over 1% – by the time you complete? On 39% of the days, or 286 days. So there was a 39% chance of you losing £2,000 or more on your currency if you were buying a home costing €200,000.
That’s bad enough, but there were 120 days over the past two years when you would have lost £6,000 or more. That’s a 16% chance – quite a risk!
There were 45 days when you would have lost £10,000 and 20 days when you would have had to find an extra £15,000.
Many people buying overseas will be a position whereby if they cannot complete, they lose their 10% deposit. As one of our clients who bought in Portugal explains, the period after they had legally committed to the purchase but had not changed their currency, was terrifying: “It was the only bit in the process that I did not enjoy. I am not a betting person and this is what it felt like I was doing!!”
Strong pound spells danger
The risk is worse for many property buyers, because people don’t tend to buy when the pound is weak. It is only human nature and a law of economics that we buy when things are cheaper – so we make the offer when the pound is strong. In their most recent survey, nearly 40% of the readers of Property Guides website said they were waiting for the exchange rate to get better before they buy abroad. If they do that without locking in their currency they are drastically increasing the chance of losing a small fortune.
It is the worst job for any currency trader when a client we have been talking to explains that because they didn’t lock in a currency they cannot now complete on their purchase. Many do not just lose the property of their dreams, but their deposit too.
That is why we urge all our clients to talk to us about their currency strategy. Yes, buy when the pound is strong, but only if you lock in that exchange rate!
Is it a risk worth taking?
Avoiding currency risk
That is where Smart Currency Exchange can help. Speak to us as soon as possible in our property search. Registering for an account is free and extremely simple, taking just a few minutes over the telephone. Then we can discuss what currency strategy will work best for you.
Many overseas property buyers opt for a “forward contract”. This sets today’s exchange rate, on payment of a small deposit, for up to a year. If you are sure that you are buying abroad, when you see the exchange shooting up you can secure that rate for up to a year in advance, on payment of a 10% deposit.
You can then wait for the property buying process to continue safe in the knowledge that you won’t have to find thousands extra.