Home » Currency Updates » What is a forward contract (and why you need one)

Since the “Wild West” days of property buying abroad, when we might have bought a Mediterranean home from a friendly chap we met in a bar, with the legal work done by the barman’s sister, the overseas property business has been cleaned up out of all recognition. But there is one risk that many buyers still seem willing to take, with their currency. Exchange rate movements can make your property much, much more expensive. In turbulent times politically and economically, that risk is multiplied. Times like these.

At the recent Your Overseas Home show, which we attended in Glasgow last month (and which we will be at in Harrogate on 29th September and also in Birmingham) we were frequently asked about forward contracts. Evidently, worries about the performance of the pound this summer is weighing heavily on the minds of anyone committed to buying a property abroad. And with good reason. A forward contract is tailor-made for times of uncertainty. Times when a government might be in trouble, or when business leaders are warning of impending catastrophe.

Anyone recognise those conditions now? So here is our basic guide to what is a forward contract.

What is a forward contract for?

A forward contract is tailor-made for times of uncertainty. Times when a government might be in trouble, or when business leaders are warning of impending catastrophe. Anyone recognise those conditions now?

The essence of any forward contract is to protect your financial position and prevent you making large losses. So if you are buying a property abroad and the exchange rate is £1 to €1.15, that means a €200,000 property costs you just around £174,000. “Great,” you say, “that’s a fair price for this wonderful villa on the Algarve/Costa Blanca/Turkish Riviera”.

But the exchange rate changes daily, and so by tomorrow the price in pounds will have changed. Most days the pound strengthens or weakens by half a cent or so, meaning that the villa now costs somewhere between £173,000 and £175,000. Well, you might think, perhaps the odd £2,000 isn’t too much of a problem… (Although it’s hardly ideal to lose that much!).

But what if the pound swings by 4 cents? Now the villa costs somewhere between £171,000 and £178,000. During the month-or-two course of the property buying process, this is entirely normal. Indeed that has been the swing since Easter. Had you agreed to buy at the height of the pound’s strength but then found yourself completing at the weakest point you would have to find another £7,000. So it can be serious. Moreover, that is completely out of your control.

With a forward contract you secure the rate with us. We guarantee to give you that rate for the agreed amount for up to a year ahead. The process is very simple. When you agree to buy a property you just call us and we will agree a rate. To secure that rate you will need to provide a 10% deposit.

Any questions?

How do I start the process?

It couldn’t be simpler. You just complete the form to open your account. We will assign you your own named trader, who will be in touch within two to three hours to discuss your specific needs and time frames. Or call us on 0808 163 0102 (or +44 20 7898 0541 if you’re outside the UK).

A forward contract will be the best option for most property buyers, but we won’t recommend it if it’s not right for you.

You say “account”; do I need to pay money in now?

No. We simply take your details including, if required, proof of address and some ID (to comply with the UK financial regulations), and you’re done. It takes about five minutes and there is no obligation to trade with us.

You can now set off to look at property abroad with a much better understanding of what exchange rate you will be achieving.

I’ve found a property, now what?

You speak to your own dedicated trader and tell him or her how much you are going to pay for the property, and more or less when. Your trader will then order the currency at the agreed rate. You transfer 10% of the money to our secure client bank account (Smart never handles your money directly) to lock in your exchange rate. This is now a legal contract and you are fully protected.

When you come to pay the remaining amount on the property, you transfer the remaining money to our secure client bank account and we send the required amount in the foreign currency to the beneficiary (usually the property seller’s lawyer).

Suppose the exchange rate has moved in my favour. Can I cancel?

No, you have made a legal agreement to trade at that rate. However, you will have saved yourself peace of mind.

What happens if the sale falls through?

Then you have two options. You have locked in the rate for a year, so you have plenty of time to look for another property. If you don’t find anything, or decide not to buy after all, you can cancel the contract. However, any money that we have lost from buying your currency in advance will be deducted from the 10% deposit that you paid us. The remainder will be refunded.

Will I earn interest on the deposit I pay you?

No, but remember you have only paid 10% of the purchase price so far. The other 90% will be earning interest in your own account.

Can I use a forward contract for longer term payments?

Yes! If you are paying for a property to be built in stages, or paying for regular maintenance or cleaning payments for a rental property, a forward contract will mean that whatever happens to exchange rates your costs will be fixed. That should be a weight off your mind as over these longer periods the pound can weaken by 10 or even 20%.

It works well if you are receiving an income in a different currency too. If you move abroad and receive an income from rentals, pensions or investments in pounds, changing exchange rates would make budgeting impossible. Setting up a forward contract means you know exactly what your income will be for at least the next year.

Find out how we can help you

Let us know a little more about your upcoming currency exchange needs. We aim to take the uncertainty away by providing guidance on which services suit your individual requirements. You can then rest, assured your money is not at the mercy of the currency markets.

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