Did you know that in times of volatile ex­change rates, you can re­move the cur­rency risk from your French prop­erty pur­chase? Matthew Har­ris ex­plains how for­ward con­tracts work

French Property News - - Contents -

Use for­ward con­tracts to avoid the worry of ex­change rate fluc­tu­a­tions

Ex­change rate move­ments have been wild and un­pre­dictable for some time now, fu­elled by gen­eral elec­tions, ref­er­enda and po­lit­i­cal tur­moil on both sides of the Chan­nel. While we’ve seen big swings in both di­rec­tions, it is clear that the move has been a gen­er­ally neg­a­tive one, and it feels like a long time since we saw rates over 1.40, de­spite the fact it was only a lit­tle over 18 months ago.

Moves like the ones we have seen can eas­ily be in ex­cess of 10% over a three-month pe­riod, and the tur­moil may not be over. When we are look­ing at house­buy­ing sums of money, even the small­est move in ex­change rate can have a big im­pact, and ones we have seen in re­cent times can eas­ily run into tens of thou­sands of eu­ros.

For prop­erty pur­chasers, this presents a prob­lem, as you agree a price for your prop­erty in eu­ros, but the amount you have to pay in ster­ling will go up and down de­pend­ing on where the ex­change rate goes. If the rate con­tin­ues to de­cline, the amount you pay for your prop­erty in ster­ling will go up. As the pur­chase process can typ­i­cally take two to three months, there is a lot of po­ten­tial for move­ment, which has put some buy­ers off the idea of buy­ing in France.

No nasty sur­prises Buy­ers can get around this prob­lem, how­ever, by us­ing a cur­rency specialist to lock in the ex­change rate with a for­ward con­tract at the time their of­fer is ac­cepted. This means that when you come to pay for your prop­erty, there are no nasty sur­prises, and the amount you have to pay in ster­ling is ex­actly what it would have been when the pur­chase was agreed. Most peo­ple wouldn’t buy a house in the UK with­out know­ing how much it was go­ing to cost, but you can lock in the rate when buy­ing in France so you don’t have to face the risk over­seas.

If some­one buy­ing a €250,000 house had locked in their rate the week be­fore the Brexit vote, they would have achieved an ex­change rate around the 1.30 level, mean­ing it cost around £189,000. The week af­ter the vote, this rate could have been as low as 1.18, raising the cost to £211,000. This dif­fer­ence of £22,000 is more than many have in their bud­get, and is cer­tainly enough to af­ford a car, swim­ming pool or even a small ex­ten­sion on many French prop­er­ties.

You can ar­range a for­ward con­tract at any point, some­times even be­fore you ac­tu­ally find a house. You might want to con­vert your ster­ling funds to eu­ros in or­der to know what your bud­get is in eu­ros. This will give you more buy­ing power if you are a cash pur­chaser as you have your eu­ros ready to go. It may also pre­vent you from go­ing over bud­get if you have a fixed amount to spend.

The ups and downs

It is im­por­tant to re­mem­ber that if you book a for­ward, you aren’t guar­an­teed to be bet­ter off. If the rate goes up dur­ing that pe­riod, you would ac­tu­ally be worse off, but if it goes down, you are bet­ter off – the pur­pose of ar­rang­ing these kinds of con­tracts is not to spec­u­late on which way the mar­ket will go, but to re­move this risk en­tirely. Big moves in the ex­change rate can and do hap­pen, and for­ward con­tracts give you peace of mind.

For­wards aren’t for ev­ery­one though, so it is im­por­tant to dis­cuss your sit­u­a­tion, re­quire­ments and pri­or­i­ties with a specialist be­fore you go down this route. They can out­line the pros and cons and how they re­late to you, but the fi­nal de­ci­sion on how and when to ar­range your cur­rency should be yours alone.

Time and flex­i­bil­ity A de­posit is of­ten re­quired, nor­mally in the 5% to 10% range of the amount you would like to fix. This isn’t a fee, and what­ever you pay as de­posit is knocked off the bal­ance at the end. For­wards can be ar­ranged for up to 12 months, and even fur­ther in some cases, so you have plenty of time and flex­i­bil­ity to com­plete on your prop­erty pur­chase – time for even the trick­i­est of bu­reau­cra­cies to go through the mo­tions.

For­wards are nor­mally re­served for large global or­gan­i­sa­tions and banks don’t of­fer them to pri­vate in­di­vid­u­als, so they are a tool that most clients do not have any ex­pe­ri­ence with. Even if you don’t go down the for­ward route, it is worth look­ing at your op­tions with a cur­rency specialist, who can keep you in­formed on how the mar­ket is per­form­ing, and

how this might af­fect you.

Matthew Har­ris is Head of Busi­ness De­vel­op­ment at Cam­bridge Global Pay­ments Tel: 0207 398 5700 cam­

The pur­pose of ar­rang­ing a for­ward con­tract is not to spec­u­late on which way the mar­ket will go, but to re­move the risk en­tirely

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