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