Learn how to save money and how to minimize your currency exchange risk when buying or selling property overseas.
In today’s international real estate market many property owners and investors buy and sell properties overseas. If you plan to sell your home and transfer the money to your new destination country, then you must plan ways to reduce your currency exchange risk.
The currency exchange rate fluctuates daily. Make sure that you check the currency exchange at the date on which you set your asking price. Bear in mind the fact that property by its nature isn’t a very liquid asset and it may take a few months or a year to sell. Small changes in currency exchange may significantly affect the amount of foreign currency you will get after selling your property.
There are two possible scenarios which can happen during the period between setting your asking price and selling your property. The currency rate may change in your favour and with the same asking price, you will then get a higher amount of money in foreign currency. Alternatively, the currency exchange may change negatively, and the amount of money in a foreign currency will be lower than your initial calculation.
There is nothing to worry when the exchange rate changes in your favour. When you sell, you will get more money in foreign currency for the same asking price at the local currency where the property is located. When the exchange rate is in your favour, it is a desirable scenario. You will thus make extra money from selling your property in foreign currency.
However, there are periods when the currency exchange changes affect negatively the amount of money you will get in foreign currency after selling your property in the local currency.
The example below will you understand better what to do to reduce your currency exchange risk.
Assume that you are selling an apartment for €100,000 euro in Cyprus and you will be transferring the proceeds of the sale in GBP to the UK. Let’s say that when you list the property for sale in March the exchange rate is €1 EUR =£0.90 GBP. And, let’s say that by the time you find a buyer and complete the transaction in October the exchange rate changes to 1 EUR = 0.86 GBP. In March when you listed the property, your sale proceeds in GBP would be £90,000, but in October your sale proceeds for the same sale price of €100,000 would be £86,000. In that case, the change in the currency exchange rate cost you £4,000.
The best way to reduce your currency exchange risk is to use a currency exchange company and lock the exchange rate for a certain period in the future. Currency exchange service providers call this product “Forward contract.” With a forward contract, you can put down a small reservation fee and lock an exchange rate for up to two years.
When you lock the rate you can plan ahead regarding the sale of your property. You will know that the amount of foreign currency you will get is fixed and won’t fluctuate up or down. By securing the exchange rate you can tell from the very first day how much money you will get in foreign currency when you sell your property.
By using a currency exchange forward contract, you eliminate your exposure to currency exchange risks. Negotiations with buyers are easier and less stressful. You should not have to worry about losing money due to exchange rate changes when you have an offer.
Discuss with your agent what the forecast for the exchange rate is. If the outlook is negative, your agent should be able to work with a currency exchange company to reduce your currency risk. Using a foreign currency exchange company not only reduces your currency exchange risk but also you save you money because you will get a much better exchange rate than you can get from commercial banks.