Currency exchange rates fluctuate constantly. When you need to exchange one currency for another for a small purchase, or a bit of spending money while on vacation, it’s usually not much and you’ve probably barely even noticed. But what if you want to make a major purchase like property in another country? When you’re dealing with hundreds of thousands (or even millions) of dollars, those fluctuations and differences can really add up.
When buying property abroad, you need to take a few extra steps to ensure you get the best exchange rate possible. Don’t leave it to the last second, and definitely don’t just leave it to your bank.
Do Some Research in Advance
Well before you purchase, start watching the currency markets. Even if you haven’t actually selected a property yet, if you know what country you’re interested in, keep track of its currency exchange rate for a few weeks or months leading up to the exchange itself. Is the currency trending up or down? Is it gaining strength against your home currency? Keep a record of this observational period. The more you know, and the longer you keep a log, the better able you are to anticipate and predict its trajectory (although it’s impossible to know with 100% certainty).
When it comes time to make your purchase, find out the most recent and official exchange rate as a point of comparison.
Currency exchange is not the same everywhere. You can exchange your currency into the local one at various businesses (restaurants, hotels, high end shops) in popular tourist destinations, for example, but the rate is going to be very much in their favour. You should rarely, if ever, use them to exchange any amount of currency, let alone the sums required to buy property.
For large sums of cash, you’re likely looking at two main options: banks and exchange brokers.
Banks are in the business of cash, credit, and currency. They can certainly handle a large exchange of this type, but you still need to do some comparison shopping. Not all banks will offer the same exchange rate, and some may have additional fees and commissions tacked on top. If those fees are a percent of the total sum, it can quickly add up when dealing with hundreds of thousands of dollars. Visit the major banks in your area and inquire about their currency exchange rate, fees, and commissions. Some will be better than others.
Currency Exchange Broker
These companies function similar to a bank in many ways, but they limit their business operation to only currency exchange. They will convert one currency into another and deliver it to an individual or company’s bank account. As with banks, you need to check out a few and compare their rates, fees, and commissions. Some of them might even specialize in overseas property purchases, in which case they can also offer services specific to buying property abroad. Even if that costs a bit more, it could be worth the extra cash to help you navigate the whole process. Find currency exchange brokers by googling “foreign exchange broker/foreign exchange company/forex broker [your city]”.
Many brokers promise to offer the best exchange rate possible. Compare a few to confirm that is true. Never take them at their word on something like this.
Fixed Rate Forward Contract
Once you’ve selected your method (bank, or more likely, currency exchange broker), you might also consider negotiating for a fixed rate forward contract. Buying property, especially overseas, can be a complicated and drawn-out procedure. With something as volatile as currency, these delays can really affect your bottom line. The currency exchange rate today may be very different tomorrow, and that difference can work for or against you, saving or costing you additional thousands for the same property. One way to plan against that is a fixed rate forward contract. If agreed upon, the contract states a fixed rate for the currency exchange, and a due (or maturity) date for the balance. When it’s time to settle up, regardless of the actual current rate, you pay only the agreed upon rate appearing in the contract. Your bank or broker makes the exchange and deposits in the account of the seller. A deposit (percentage of the whole amount) is required upon signing the contract. It sounds like a no-brainer, right? But remember...while it is possible that the rate may work against you during a delay and cost you more money, it can also go the other way and make a property cheaper for you, too. This is where your research and records come in handy.
Currency fluctuates, sometimes wildly. You need to take steps and precautions to protect yourself when purchasing something as expensive as property. Do some research, shop around, and if possible (and if you feel it’s in your favour), request a forward contract. Be a savvy overseas consumer.
Image: Images Money , via Flickr