x Abu Dhabi, UAEThursday 27 July 2017

Larger purchases: A penny can cost thousands if you don't watch the rates

Even a relatively small currency shift can have a big impact when you're buying or selling property worth hundreds of thousands of dollars.

The weak pound has made UK property attractive, but buyers need to ensure they can pay off their loans if sterling rebounds.
The weak pound has made UK property attractive, but buyers need to ensure they can pay off their loans if sterling rebounds.

Even a relatively small currency shift can have a big impact when you're buying or selling property worth hundreds of thousands of dollars. Say you're paid in US dollars (or dirhams), and last November you spotted the ideal property in Spain for ?200,000. At the time, US$1 bought ?0.67, which meant the property would have cost $298,500 before charges. In March, with the dollar worth ?0.73, that property would cost $274,500, a savings of $24,000.

People who own property overseas are exploiting currency swings to offset their losses from falling housing markets. Property prices in Spain, a hugely popular second-home market, have plunged by between 30 per cent and 50 per cent, but British owners are using the equally large drop in the value of the pound to offset their losses, says Les Calvert, director of Property Abroad, a UK-based website that helps people buy, sell and rent property around the world.

"Many of our clients have properties in Spain, where property prices have fallen sharply. But many are selling up now to take advantage of the euro's relative strength against the pound. After they have converted their sale proceeds back into sterling, they have recouped most of their losses." Property is an illiquid investment, and timing a sale to match currency movements is tricky. Buying also takes time, but you can benefit from attractive currency rates by transferring money ahead of your purchase.

Many property buyers mitigate risk by remitting, say, 50 per cent of the necessary funds immediately and the rest when spot rates become favourable, says Mark Bolsen, head of the currency trading desk at Travelex, the foreign exchange specialists. You can also hedge against future movements by fixing your exchange rate now, then making monthly transfers at that rate for up to two years. That way you can lock into a favourable rate, even if you don't have all the money to hand.

"Recent extreme currency shifts have alerted people to the dangers of being exposed to an overseas currency," says Mr Bolsen. "The difference between £1 buying $1.64 and $1.50 is huge, and that has shifted in just a few weeks. Risk aversion is back." When buying property overseas, you also have to decide which currency to use for your mortgage, says Mr Clarke of Dubai-IFA.com. "If you have a euro-denominated mortgage, it can be risky servicing that from a dollar or sterling income. If possible, you want your mortgage in the currency you earn in. But it depends on your personal circumstances. If you plan to pay the mortgage on a holiday property in Spain by renting it out to tourists and charging euros, you probably want a euro mortgage."

With sterling weak, now may seem an attractive time to buy property in the UK, says Mr Clarke. "But if you take out a mortgage in sterling, could you still afford it if the pound strengthens in two or three years' time? When dealing in different currencies, you always have to be two steps ahead."