Foreign Exchange Mortgages
Foreign currency movements are without a doubt one of the most difficult things to guess. Yet once you are an overseas property owner, you are going to have to become involved in exchange rates, even if it is solely for the purpose of small amounts of money transfer from the UK.
Should you have a mortgage in a currency that is not sterling you are going to have to seriously consider the best way of managing the risk of variable exchange rates.
How do exchange rates vary?
Exchange rates change every hour. Therefore, purchasing a property with a foreign currency mortgage means you are essentially buying without being aware of precisely the amount you are going to have to pay which is not something we would do in most other walks of life.
The bulk of buyers open an account in the local currency and transfer money in to it as and when needed. Should you have mortgage payments to meet, you can arrange for frequent monthly transfers from an account based in the UK.
Transferring a lump sum
Alternatively, you may transfer a lump sum periodically, say after several months. However, you when you move your money you need to be aware of those highly changeable exchange rates.
In depth knowledge of the market place is a crucial starting point for anyone who wishes to deal with currency markets. You will have to find out about the economy of the country you are interested in; investigate patterns of boom and bust or whether or not its economy has grown steadily. A case in point is Switzerland, which has grown by an average of between 2% to 3% over the last decade.
Factors affecting foreign exchange
Several factors like changes in interest rate, unemployment, political fluctuations and key world events affect the foreign exchange market. Instead of attempting to forecast an unpredictable future, currency specialists suggest you spread your risk. Do not purchase all the currency you need in one go or delay purchase till the last moment when you buy it all, however, hedge against future changes.
There are two key ways of doing this; firstly, should you be risk averse and wish to play safe, currency specialists enable you to buy your foreign currency in advance for payments up to two years on. Thus you are certain as to what the costs are going to be in pounds sterling without any worry as to possible fluctuations. This is known as a forward contract. Hereby you manage your risk and you help your cash flow as you just pay approximately 10% of the money needed in advance.
The only negative feature of the forward contract is that if the currency weakens over that period of time, you are going to essentially be out of pocket as you are fixed in with the higher rate. An alternative is a limit order. Currency dealers can enable you to place an order in the market at the level you choose. Hereby the currency is bought for you once that rate is reached. For a limit order, you need to have the money up-front. A combination of a limit order with a stop loss order, a minimum level of currency purchase, means that you can essentially set upper and lower exchange rates.
Rates can work for and against you
Given the potential risks involved, there is some good news. Should you buy an overseas property and the pound increases in value against the currency you have taken your mortgage out in, you can buy more of that currency with the same number of pounds. Hence, you would need fewer pounds to pay off the monthly mortgage payment or, should you wish to be debt free, you could pay off your entire mortgage more quickly.
As an overseas property owner, you will need to know what foreign exchange rates are doing, have done and are going to do.
So, conduct your research thoroughly, follow the markets and take on board professional advice from reputable, advisers. They usually have no charges for transfer fees or commission for sending your money abroad; instead they relying on competitive rates to generate money.
