The rating game

Tuesday, April 19, 2011

The rating game

When you buy or move overseas, chances are you'll need to exchange pounds into another currency and transfer these funds to a foreign bank account. To do this we recommend using a specialist currency broker and we'bve worked out a timeline showing then ways they can help you save money along your buying "journey".

Before you begin your property search
Be prepared by opening an account with a currency broker early, preferably before you've even started looking to buy abroad – after all, it's free to do so.

Not unlike opening a bank account, opening an account with a currency broker will involve agreeing to the firm's terms and conditions of trade, and for anti-money laundering purposes you will need to provide a copy of a form of photo ID, such as a passport and/or driver's licence, and proof of your registered address, in the form of a bank statement or utility bill (gas, electricity, water, landline telephone), that's no more than three months old.

Fixing a budget for your overseas purchase
One of the most useful tools currency brokers have for overseas homebuyers is the “forward contract”. This effectively protects your buying power from currency fluctuations by letting you fix an exchange rate based on a current rate for a future transaction. There are two types of forward contract: a “fixed forward” lets you fix today's rate for a fixed date in the future and take delivery on that date only; an “option forward” lets you fix today's rate up to a set point in the future and gives you the option of taking delivery at any point up until the agreed date.

Why would you need a forward contract? Before you buy abroad it's likely all your funds are in pounds, which means when you come to purchase you'll need to exchange them into another currency. However, due to fluctuating exchange rates, what your pounds buy today will not be the same as what they'd get you in a week, month or year's time – a forward contract gets rid of this uncertainty.

Once you know what currency you're buying in, say euros, speak to your account manager about what rate they could secure for you. For example, if your Sterling budget is £150K and the current rate is £1=€1.17, typically they might guarantee you a rate of £1=€1.15 for up to 18 months, meaning you know at any time in that period your £150K is worth €171K, allowing you to budget in euros safely. To secure a forward contract, typically your broker will ask for ten per cent of the total value of the future transaction you wish to make.

Paying for your property
Once you've found a property and paid a (refundable) cash deposit to secure it, it's advisable to open a local bank account where you are buying. Back in the UK, having paid the necessary amount of pounds into your currency broker account, you can now instruct your account manager to exchange them into euros, either at the rate agreed with a forward contract or as a one-off spot contract based on the current rate.

And if you are not restricted by time and set on achieving a particular exchange rate, “stop-loss orders” and “limit orders” allow you to buy and sell currency only when a specified exchange rate is available to you. Your account manager will monitor the currency markets and keep you updated.

Whichever contract you've used to exchange your pounds, your broker can now transfer your converted euros into your overseas bank account. You now have the funds available to pay a full deposit and complete on your overseas purchase – guided by an independent lawyer of course.

Note, another advantage of using a currency broker to transfer money into overseas bank accounts, besides their competitive exchange rates, is that they tend to charge less in bank transfer fees than banks. And don't forget, most brokers now allow you to access your account with them on-line, meaning you can do much, if not all, of the above from the comfort of your home in the UK.

Owning your property as a holiday home
If you've financed your property abroad with a mortgage from a local bank and will be making your monthly repayments from the UK, you will need to make regular transfers abroad.

Other reasons you might need to transfer money overseas regularly as a holiday homeowner include paying bills, including utilities and taxes, paying a rental management company and paying community fees. And in reverse, you may need to repatriate money on a regular basis if you receive payment for rentals direct to your overseas bank account.

Currency brokers can help you do all of the above with their regular payment plans. Typically, they can set up automated payments via Direct Debit from your UK bank account and can offer three options for regular payments. Firstly, you can fix the amount of pounds you send overseas, for example each month, meaning the local currency received in your overseas bank account will fluctuate with the exchange rate. Or, in reverse, you can fix the amount of local currency that is paid into your overseas account, meaning the amount of pounds being debited from your UK account will vary according to the exchange rate. Thirdly, you can use a forward contract to fix the exchange rate you receive on all regular payments over a specified period, such as 18 months.

Moving or retiring abroad
If you're making a permanent move to your property abroad and have a UK pension or source of income, again you will need to make regular transfers between an account in the UK and one abroad. Forward contracts are especially useful for transferring pensions as they allow you fix a rate for up to 18 months or two years in the future, meaning the recipient knows precisely how much they will receive each month in both Sterling and their local currency. A popular option amongst people relocating abroad who need to transfer large amounts of funds is to spread their exposure to exchange rates by swapping half of their funds with a spot contract or forward contract (so at a fixed rate they are happy with) and then the other half with a limit order. Using a limit order means your broker holds on to your remaining funds, exchanging them only when they can achieve a rate agreed by you. You'd do this if you had an inkling that the rate might go in your favour over the next few months but didn't want risk all your funds – just in case things went the other way.

Selling up for moving back to the UK
Repatriating money from abroad is the final way currency brokers can help British people get the most from their money when they sell their holiday home or are moving back to the UK.

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