If you had been considering buying a property in the Algarve, you may have been concerned with the drop in the value of the pound following the result of the EU referendum last year. Although some buyers may have felt deterred and continue to watch the currency market with caution, the property market within the Algarve continues to thrive as many English owners look to repatriate their funds back to the UK.
There is a concentration of British expatriates in Portugal, which means that often the vendors are British and property prices can be agreed in pounds and this can protect both buyers and sellers from movements within the currency exchange market. The final payment will still need to be made in euros by law, but often sellers have a figure in mind for their return to the UK and can target this, rather than a euro price which can prove to be a more moveable feast for all parties due to the volatility of currency. Setting the price in sterling gives certainty on both sides and is allowing the continued strength of the property market in Portugal.
This approach certainly facilitates a measure of certainty throughout the process, but once the price has been agreed, the payment still needs to be made in euros which means buyers and those looking to repatriate funds back to the UK will still need to plan ahead to manage their funds. A foreign exchange strategy is a plan devised to identify and manage foreign currency cash flows. The aim is to mitigate the risk of negative exchange rate movements and ensure that you stay within your budget. Even very small fluctuations can have a big impact on major purchases such as a property deposit or payment, and will continue to have an impact if you’re buying a property and need to make maintenance payments throughout the years to come.
In developing a plan, you need to balance any opportunities that may be present in exchanging currency with personal preferences. For example, some people are more risk averse or may require the reassurance of specific sums regularly leaving or arriving in an account but others may be prepared to take a risk to target the best rates at any given moment and potentially save money. Circumstances also play a part; in some cases, timing is an issue and someone who has just found their dream home in the sun and needs to provide a deposit may not be able to adopt some of the longer-term tactics for the initial transfer.
The three most common tactics considered when developing a foreign exchange strategy are:
1. Spot Contract. This can be useful if you want to make a transfer immediately, for example if you’re securing a property with a deposit. Setting up numerous spot contracts each time you want to make a transfer isn’t always the most efficient way to manage your money across borders, but if an urgent need arises out of the blue, it’s a valuable facility.
2. Forward contract. This allows you to secure an exchange rate in advance and can be held for up to two years. Forward contracts offer peace of mind on the end-value of a currency transfer. They are useful when purchasing a property and for effective budget planning for property maintenance, as well as living expenses from pension payments. Please note forward contracts may require a deposit
3. Market Order. Market orders comprise both limit orders, which allow you to target a specific beneficial exchange rate you want to achieve and stop-loss orders, which identify the worst-case rate that you need to achieve. These two often work together – a desirable rate can be targeted but if the market heads in a different direction, a stop-loss order can help to limit the damage by guaranteeing a minimum rate for the exchange.
The expert moneycorp team can provide guidance on the market, help you to decide on the right strategy and explain how the above solutions may work for you. As one of the UK’s fastest growing exchange companies, moneycorp can help to take the stress and uncertainty out of managing your finances overseas and help to develop a foreign exchange strategy to maximise your overseas property investment.
moneycorp is a trading name of TTT Moneycorp Ltd which is authorised and regulated by the Financial Conduct Authority for the provision of payment services. All customer funds are safeguarded in segregated client bank accounts.