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CAN I BEAT THE EXCHANGE RATE?
QI’m planning to buy a new-build property in France and will need to have funds available in euros to pay for it when the development is completed in four months’ time. I’ve been watching the exchange rate for some time but obviously it’s difficult to know what will happen, especially as we move closer to Brexit. Would it be beneficial for me to use a forward contract, and are there any disadvantages? I’ve also recently come across a flexible forward contract but I’m not sure what the difference is? MARCUS TATE Thanks for your question. As you say, it’s very difficult to predict what will happen in the currency markets and Brexit will almost certainly have an effect on the sterling/euro exchange rate over the coming months. Even with the best planning, some things can come out of the blue as well.
A forward contract could certainly be an option for you to consider as it is particularly useful when buying a property abroad. This is because it gives you the security of knowing what you’ll pay in the future, which helps you to stick to a budget. After all, you wouldn’t buy a house in the UK without knowing the final cost.
Most currency specialists should be able to fix an exchange rate for up to two years ahead, but there are different types of forward contracts available to you. Usually you can either fix for a specific date in the future, or you could fix for a period of time (for example, any point within a three-month window). The first option is great if you know the exact date that you’ll need the euros. The second is what’s known as a flexible forward, and as the name suggests it provides a little more flexibility on the date. Here you are able to access your euros at any point within the window you choose.
It’s important to note that forward contracts are not usually available through banks. If you’re using a currency specialist, you should speak to them to see if their services differ from what I’ve explained above.
While a forward contract will eliminate the risk of moving exchange rates, it’s essential to know the potential disadvantages too.
Firstly, as the rate is fixed at the outset, you won’t benefit if the sterling/ euro exchange rate subsequently becomes more favourable. That being said, the purpose of a forward contract is not to speculate on whether the rate will get better or worse, but to remove that risk completely.
The second disadvantage is that it is what’s called a ‘firm contract’. In plain English this means that once it’s set up, you have to go ahead with it. If you need to cancel it you may incur additional costs. You should speak to your provider about potential charges before setting up a forward contract.
You will have to pay a deposit to set up the forward contract, normally around 10% of the total value. If there are very large swings in the currency markets, you may be asked to increase your deposit before the final amount is due. Although this rarely happens, it’s something you should bear in mind.
I hope everything goes well with your purchase. It’s worth knowing that forward contracts can also be used for ongoing costs, such as mortgage payments or regular transactions for living expenses. Your payments can be collected by direct debit each month and then converted at the same exchange rate for up to two years.
Please note this is not personal advice or a recommendation to buy or sell any of the currencies mentioned. You should discuss your situation with your currency provider or seek advice.