Before you can purchase property in Spain, you must first understand which currency you are dealing with. The chances are that you will be dealing with a foreign currency that is different from that of your home country. It is not uncommon to see international investors using currencies such as Swiss francs, US dollars, Pounds Sterling, and Euros. Chances are, if you are buying a property in Spain, you will need to purchase Euros to do so. It is a good idea to familiarize yourself with foreign currency. People can lose money from the foreign exchange (Forex) rate by paying more than they should and not knowing where to buy. Carlos Torres from local estate agents Javea.Properties on the Spanish Costa Blanca, outlined an example for us to explain further the pros and cons of using forex to help save your money when purchasing overseas property.
In the following example, we will assume you will be purchasing Euros with Pounds Sterling. Depending on the time you are buying Euros, the overall price of Pounds Sterling can be increased or decreased.
An example from April 2020 shows us that last week a property was worth €250,000 or £217,390 or $271,625. A week later, that same property will be worth £218,055. As you can see, the price can fluctuate over £665 or roughly $2,500 US in as little as one week.
Dealing in foreign exchange markets can be a risky business. It is not uncommon for unsuspecting buyers to overpay for the Euros needed to purchase their property. The risk that the exchange rate will fluctuate after the purchase has been made is known as Euro or transaction exposure. Transaction exposure is an avoidable risk that can cause serious financial loss for international buyers.
If you have already purchased the property in Spain, you may still find yourself needing to use the exchange rate to pay for your property. This means that you will still need to purchase Euros, and even though the fluctuation in these transactions may seem small compared to the total price of the property, they do add up over time. Even small amounts are regularly overpaid for when transferring money in and out of Spain.
Let’s take a deeper look at what the Forex rate actually is as well as answer a few questions about how your property transaction may be affected and what you can do about it.
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The Forex Rate
Source: unitistraining
The foreign currency exchange rate is how much your native currency is worth in another country. For example, how much one US dollar is worth versus one Euro. If the Euro is worth more, you will need to spend one US dollar plus the difference before you can purchase one Euro. Exchange rates can fluctuate, making the total difference between the currencies higher or lower.
Unfortunately, it is impossible to predict the fluctuations in the exchange rates. The exchange rate is very similar to the stock market. What we mean is that just like the price of a stock, exchange rates are constantly changing. Also, the foreign exchange market is open five days a week. A one day value of the foreign exchange rate is roughly 1.6 trillion US dollars. Similar to the stock market, fluctuations are the result of supply and demand amongst diverse currencies.
How Does the Forex Rate Affect My Property Transaction?
Source: halofinancial
Euro exposure is similar to a mortgage in the United States. When purchasing a property in Spain, you must commit to Euro exposure. In other words, you must pay back a certain amount of Euros in a given amount of time. Most of you reading this probably do not already have a savings of Euros. This means that you will need to purchase Euros with a different currency. For this example, we will use GBP or Pounds.
Let’s assume you have set aside a certain amount of GBP to use to purchase property in Spain. Keep in mind that due to the Forex rate, the number of pounds you possess may not equal their physical value. This could be a good or bad thing. Sometimes, you will have more, and sometimes you will have less.
Here is an example of how much the Forex rate can cost you
Source: currencies
In 2015, the exchange rate fluctuated 6% within a little as three months. At the beginning of October, the exchange rated began at 1.35 €/£. The number then rose to 1.43 €/£ in the middle of November and dropped back to 1.35 €/£ at the end of December. If you bought a property for €200,000, you could be paying an extra €12,000 depending on the date of the sale.
It is common for the purchase process to be completed over an extended period of time, such as several months. Since the exchange rates are always changing, it is impossible to know how much you will spend in total on Euros until the transaction is complete. Take extra consideration if you are purchasing a property that is under construction or has not even started construction. This could cost you more if their deadlines do not complete projects.
Buying a home that is being resold is a little bit different but can also cost you depending on the changes in foreign exchange rates. Let’s take a closer look.
The majority of individuals that purchase resale properties pay a 10% deposit at the time of signing the private sale contract. This contract is also known as “Contrato de Arras”. When the individual sale contract is signed, most buyers have already purchased Euros at an elevated rate. The deed to the property cannot be signed before the Notary until the other 90% of the sale price is paid off. This could be anywhere from a few months to a few years. Ultimately, how long it takes to pay back and how much the exchange rates fluctuate will determine how much the purchase of the needed Euros has costed you.
How Can You Lower Your Risk of Spending too Much?
Source: propertyguides
The majority of purchasers buy Euros from their banks. Unfortunately, banks charge ridiculously high exchange rates. The best place to purchase foreign currency is through a foreign currency dealer. Benefits of purchasing through a currency dealer include:
- The best rates
- The ability to lock you into an agreed rate
- Charge the lowest commissions
- Provide advice on managing your risks
While using a foreign currency dealer is a good idea, they also pose their risks. If your foreign currency dealer were to go bankrupt while in possession of your money, you may lose all of the money you have invested. If you are from the UK, be sure your dealer is authorized and regulated by the Financial Conduct Authority.
