Many people often expose themselves unwittingly to ‘currency risk’ by omitting to take into account currency fluctuation between the signing of a sales contract and completion ie, wherein they hand over the money. After all, it is not uncommon for a transaction to take three to six months to complete, and if history as recent as last year is anything to go by the euro could fluctuate as much as five cents against sterling.
While this may seem small change, on a Euro 100,000 purchase price (around £70,000 – an amount that doesn’t buy much overseas in 2005), a five cent fall from E1.45 to E1.40 to the £1 would leave you £2,463 out of pocket. However, you can protect yourself against currency risk by arranging a ‘forward contract’ at the time of purchase, effectively fixing now the exchange rate to take delivery of the currency in the future. Most forex dealers offer the service between two days and two years’ duration, an especially effective device for those buying a property ‘off-plan’ which can often take 18 months to two years to completion.
Buying off-plan, literally from the plans, although often a show house can be viewed, is common practice in Spain and increasingly in other European countries. When buying in this way, especially in Spain, it is the norm to pay in three tranches: 50 per cent on signing the sales contract, 25 per cent six months prior to completion and the balancing 25 per cent when you receive the keys.
A forward contract is particularly effective when buying in this manner as you can fix the currency rate at an agreed figure with the broker to ensure that you pay no more than the rate agreed in the future. Do be aware, however, that despite ‘fixing’, the exchange rate may still work against you i.e. increase to a figure greater than the one you have agreed. In such a circumstance your only concessions are a reassurance in knowing that the market could have worsened and that you are no worse off then when you agreed the rate, leaving you knowing exactly what your financial commitments would be in the future.
Should you choose to take out a forward contract a 10 per cent deposit is the minimum required to be lodged with the forex broker, with the balance payable prior to the maturity of the contract. Any money deposited with the broker will be placed in an ESCROW account, effectively a protected customer account held at the broker’s bankers. Customs & Excise certification gives the consumer added guarantees that their money is safe and secure.
Should you, instead, wish to pay for the property by cash or via a monthly mortgage payment you will be required to open a bank account in the country in which you are purchasing; a procedure your solicitor will gladly help you with and for which you in person will need to be present to sign the necessary documentation. Lastly, when buying a property in Spain you are required by law to have a fiscal number, known as an NIE. As a fellow EU member state the paperwork is issued as a formality and, on request by you, your solicitor will apply for it on your behalf.
Why not see how far your money might go if you buy abroad? Search for your dream overseas property on aplaceinthesun.com
The views represented in this article are those of the author and not of Channel 4. The purpose of the article is to provide general information only and does not constitute financial, investment, legal or other advice.You should not rely on any information provided in this article and you should always seek out independent professional advice relevant to your own particular circumstances.
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