How can you purchase property abroad in a financially beneficial way? To be clear, we are talking about buying property in countries outside the euro area which do not have the euro as their currency.
EUR is used here as the base currency as an example, but this information is also applicable to other currencies in case your home country does not use the euro, such as USD, GBP, CAD, BGN, HUF, PLN, SEK, NOK, CHF, AUD, SGD, JPY, CNY, HKD, ZAR, NZD, AED, RUB, DKK, etc.
There are many things to consider when buying property abroad.
One of the certainties is that you will have to change your euros into a foreign currency if you are going to buy property in a country outside the euro zone. You will also have to send these funds abroad. If you are not careful, you will lose thousands of euros in exchange rate fluctuations at this stage!
On this page you will learn how to buy property abroad (outside the Eurozone) at the best exchange rate!
Table of Contents
- 1 The exchange rate and Murphy's law
- 2 Protect yourself against adverse exchange rates - Buying property abroad
- 2.1 Purchase the foreign currency immediately
- 2.2 Purchase the foreign currency via a forward contract
- 2.3 Purchase the foreign currency via a currency option
- 3 Buying foreign currency through a bank or a bureau de change?
- 3.1 Specialisation and expertise
- 3.2 Advantageous and less advantageous exchange rates
- 3.3 Shipping costs
- 3.4 Speed
- 3.5 Caution with periodic payments | Property abroad
- 4 Exchange rates & property abroad | Conclusion
- 5 Carefree investing in property abroad
- 6 Property abroad: Additional info
The exchange rate and Murphy's law
During your search for a suitable property in countries outside the euro zone, you will surely have noticed exchange rate fluctuations.
Chances are you will have experienced moments of both consternation and elation.
Murphy's Law states that if something can go wrong, it will.
Unfortunately, Murphy's law often applies to people who put off changing money until the last minute...
Often these persons are confronted with a painful and costly frustration: just when the developer, broker or lawyer orders the transfer of money, the exchange rate takes an unfavourable direction...
Protect yourself against adverse exchange rates - Buying property abroad
When buying property abroad, you should definitely take measures against potential negative exchange rate movements.
Purchase the foreign currency immediately
This is an option if you need the foreign currency quickly.
If you do not need the foreign currency immediately, you could also buy the foreign currency immediately and just keep it until you need to pay for the property.
The disadvantage of this is that you have to be able to advance the full amount immediately and then these funds are no longer available for other investments.
You can avoid this problem of unavailability of your funds by using a futures contract.
Purchase the foreign currency via a forward contract
By concluding a forward contract with an exchange bureau, you can completely eliminate exchange rate fluctuations.
In such a contract, you lay down at what rate you will buy the foreign currency in question. So you agree on a transaction in the future.
At the time of signing the contract, you only have to pay a deposit that varies from exchange office to exchange office (can be as little as 10 per cent of the total amount).
In such a case, you can rest easy and not worry about what the exchange rate will look like in two months' time.
The risk that the foreign currency would suddenly become more expensive in the future is fully hedged with such a forward contract.
A forward contract offers you the greatest security: you know exactly at what exchange rate you will be buying foreign currency. So you can make a stable financial planning.
With a forward contract, you cannot benefit from favourable price movements. After all, you set a fixed price.
If you want to benefit from favourable exchange rate movements, you should opt for a currency option.
Purchase the foreign currency via a currency option
By taking out a currency option, you can limit the exchange rate risk. This way, you can take advantage of an exchange rate fluctuation that would be to your advantage or limit the damage if the exchange rate moves against you.
A currency option is a contract under which, for a specified period of time or on expiry, a currency is exchanged for a currency which is not the same as that of the other currencies:
- On the one hand, the holder of the currency option (you) acquires, through the payment of the option premium, the right to buy or sell a certain quantity of a currency at the exercise price; and
- On the other hand, the writer (exchange house) assumes the obligation to sell or buy these currencies at the strike price if the holder (you) exercises the currency option.
It is a transaction that can be carried out at a set price and within a set period of time. The exercise of such a currency option is a right, not an obligation. This is in contrast to a forward contract where there is an obligation.
There are two types of currency options: a call option and a put option.
Call option | Property abroad
A call option is a currency option that buys the right to buy a foreign currency at a specified exchange rate. You take out such an option if you expect the exchange rate to rise and develop in your favour in the future.
In this way, you can benefit from a peak in the exchange rate. You then sell your euros only when a certain exchange rate is reached. By biting when the exchange rate has exceeded a certain point, you can buy a larger amount of foreign currency for the same amount of euros.
For example, the exchange rate of the euro may be 1.11 against the dollar. For 1 euro you get 1.11 dollars. Instead of buying immediately, you want to wait because you expect a positive evolution of the exchange rate.
So you take out a call option at an exchange rate of 1.15. When this exchange rate is reached, you can exercise your right and for 1 euro you get 1.15 dollars. You then gain a financial advantage by not buying immediately but waiting via a call option.
On an amount of EUR 100 000, your profit after the exercise of this call option would then be USD 4 000 (USD 115 000 - USD 111 000). You still have to charge the premium, see below.
Put option - Property abroad
With a put option you buy the right to sell your euros at a fixed exchange rate. You buy a put option if you suspect that the exchange rate will fall in the future.
So you are assured of a safety net and a guaranteed exchange rate (floor price) and at the same time you can take advantage of a better exchange rate if it comes up in the meantime.
Combination of call and put option
You can also combine both types of currency options. This allows you to define a range in which the exchange rate can fluctuate. This way, you are also assured of a guaranteed exchange rate (which will be somewhere in this range).
Advantage of a currency option
Call option: With the help of this currency option, you can benefit from a favourable exchange rate movement (you then buy more foreign currency for the same euro).
Put option: This valuation option allows you to limit the damage in the event of an unfavourable exchange rate movement.
Combination of call and put option: With this combination you can both profit from a favourable exchange rate movement and hedge against an unfavourable exchange rate movement.
Disadvantage of a currency option
To buy the right to exercise such an option, you have to pay a premium. This premium is called the currency option premium.
This is then an additional cost when buying property abroad (outside the euro zone).
Buying foreign currency through a bank or a bureau de change?
In most cases, specialised exchange offices offer better and more interesting exchange rates than banks. The foreign exchange market is also a competitive market with a lot of supply and demand.
Specialisation and expertise
Large banks are not specialised in hedging exchange rate risks and minimising losses. They are also too bulky to transfer large sums of money quickly and efficiently abroad.
A specialised and international exchange office does have these advantages.
Advantageous and less advantageous exchange rates
In reality, the exchange rate fluctuates constantly throughout the day.
Factors that influence the exchange rate are things like:
- Supply and demand
- News announcements
- Political events and political stability
- Reports on the economy
- Economic forecasts
- Business confidence
- Speculation, etc.
Banks and their buffer around the interbank rate
The so-called interbank exchange rate is the rate that banks or large financial institutions charge each other when trading foreign currency for millions, it is also called the spot rate.
As a private individual, you cannot buy currency at this interbank rate, as you only buy small amounts of a foreign currency. You can compare this with the difference between wholesale and retail prices. Only wholesalers with sufficient volume can buy at the interbank rate.
As a private individual, you get an exchange rate from the banks that remains the same throughout the day.
The banks set an exchange rate in the morning and immediately build in a buffer to secure themselves. In other words, banks build a buffer around the interbank rate.
This buffer built around the interbank rate ensures that banks do not book losses when they trade foreign currencies to individuals.
This buffer is large and ensures that there is enough slack between the interbank rate at which they themselves purchase foreign currency and the exchange rate at which they sell foreign currency to you.
The effective exchange rate may change permanently, but it does not matter since the buffer has been selected generously. Thus, the bank will always make a profit when selling foreign currency to individuals.
Currency exchange offices and their more competitive rates
Banks cannot offer the same exchange rates as specialised bureaux de change.
A specialised exchange rate office better reflects these permanent exchange rate fluctuations and thus offers more competitive exchange rates. Such offices do not work with such a daily exchange rate and can therefore be more responsive.
You can easily save a few percent by buying your foreign currency through a specialised exchange bureau.
And a few percent out of a large amount (which is always the case when buying property abroad) adds up to a profit or loss that should not be underestimated!
Rules of thumb - Foreign currency when buying property abroad
Finally, some rules of thumb on what you can expect to pay when you purchase foreign currency from the following institutions. For comparison purposes, the interbank rate is taken as a reference:
- Banks: They will charge you up to 4 per cent more than the interbank rate for current currencies such as the dollar and up to 9 per cent more than the interbank rate for non-current currencies.
- Exchange offices: Some charge up to 1 per cent more than the interbank rate, depending on their internal cost and remuneration structure.
- Credit cards: These companies will charge you up to 7 per cent more than the interbank rate.
- Physical shops in airports where you can change money: They will charge you up to 15 per cent more than the interbank rate.
As you can see, specialised exchange offices offer the best exchange rates (they take the smallest profit margin). Keep this in mind when purchasing property abroad.
If you want to transfer the amount abroad, you will also have to pay shipping costs.
Most banks charge a fixed shipping fee per transaction, regardless of the size of the amount. This cost can amount to tens of euros per transaction.
Specialised exchange offices only charge the administrative shipping costs and do not take a profit margin from this. The shipping cost is a fraction of what banks charge.
Most banks are downright slow when they have to send money to foreign non-SEPA bank accounts. It can sometimes take up to 5 working days versus 1 to 2 days through a professional exchange office.
Caution with periodic payments | Property abroad
Take into account the years that follow the purchase of your property abroad outside the euro zone!
Chances are that you will drink a glass of bubbly to the happy ending and the great savings that you have been able to make through the exchange office. Yet the story does not end at the moment of purchase.
Whether you are moving permanently abroad or buying a second home or a buy-to-let property, it doesn't really matter...
Chances are that you will regularly have to transfer money from your home country to the country where your property is located.
Examples of such periodic payments during and after the purchase are:
- Payment in instalments if it is a sale on plan (turnkey)
- Capital and interest repayments on a locally concluded mortgage loan
- Insurance premiums
- Management costs (rental, maintenance, cleaning services)
- Local taxes (annual property tax and taxes on rentals, for example)
- Electricity and water costs
- Pension benefits. If you are going to retire abroad, it is best to receive these pension benefits on your local account in your home country in euro. Then you can use an exchange bureau to convert and transfer your pension benefits into the other currency. That way you will definitely have more left over from your well-earned pension!
Many smaller periodic payments together also form a large payment... So for such periodic payments too, it is best to use the most advantageous channel: A professional exchange office.
For such periodic payments you can opt for a forward contract so that you know the exchange rate at which you will buy the foreign currency.
This is possible as of a deposit of ten percent of the total value of the funds you wish to exchange.
Two more options
Another option is to periodically transfer the same euro amount.
As a result, the amount you will receive in your foreign bank account will fluctuate with the exchange rate.
The reverse is also possible: you then decide what amount in foreign currency you want to receive periodically and then the amount sent from your euro bank account will fluctuate with the exchange rate.
Exchange rates & property abroad | Conclusion
For every problem there is a solution. The problem is that sometimes you just don't realise that there is a certain solution...
It is certainly worth tackling this exchange rate issue seriously.
Purchasing foreign property investment [AVAILABLE SOON] with attention to the exchange rate can save you thousands of euros!
Finally: Exchange offices offer the best conditions. This does not mean that you should recklessly deal with any exchange office. Choose an internationally reputable and licensed exchange office.
Carefree investing in property abroad
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