To purchase property in Spain, it is likely that you will need to buy foreign currency, as there is a strong possibility that you will need to obtain currency that is not native to your home country. Swiss francs, US dollars, GB pounds Sterling, and euros are commonly used currencies amongst foreign investors. It is almost a guarantee that you will need to purchase euros to buy a property in Spain. Unfortunately, it is no rare for people to lose money on the foreign exchange rate when purchasing foreign currency.
An example of the fluctuation between pounds and euros from April 2020 shows us a property was worth €250,000 or £217,390. In as little as a week later, that same property was valued at £218,055, resulting in a price rise of £665, if you had been buying that property at that time paying with sterling.
A Guide to the Exchange Rate When Buying in Spain
Foreign exchange markets are complex. The likelihood of overpaying for euros is high if you have little knowledge. Transaction exposure is the risk that the exchange rate will fluctuate after the purchase has been agreed. This is a risk that can be avoided if investors understand the exchange rates and take the necessary precautions. Otherwise, financial loss could be the fate for international buyers.
You may find yourself needing to buy euros to pay for your property unless you already have bought a property in Spain you are selling, or if you get paid in euros. Many buyers will agree on a price, then pay the balance over months in installments. The fluctuation in the currency exchange rate may seem small during the months until the sale completes, but when we are talking about several hundred thousand euros as the total price of the property, exchange rate fluctuations are important. Often, extended installment payments cost buyers money in the long run.
Below we will explain what precisely the foreign exchange is and answer some questions you may have.
Explaining the Foreign Exchange Rate
What is the foreign exchange rate?
The Forex currency rate is how much your native currency is worth in another country. An American may need to know how much his one US dollar is worth versus one euro. To purchase one Euro, he will need to spend the difference between the dollar and euro before he can buy the Euro. Exchange rates continuously fluctuate, making the total difference between the currencies higher or lower from one day or even one hour, to the next.
There is no way to know how the exchange rates will shift. Just like the price of stock, exchange rates are always changing. The foreign exchange market is open five days a week, and in just one day of foreign exchange trading 1.6 trillion US dollars change hands. The rise and fall of prices are the results of supply and demand amongst diverse currencies.
How Does the Foreign Exchange Rate Affect My Purchase?
When purchasing a property in Spain, you must commit to euro exposure. This means you must pay back a certain number of euros in a certain amount of time. If you do not already have a stash of euros, you will need to purchase euros with a different currency.
Let us look at how the foreign exchange rate can make your purchase more expensive.
Let us assume you have set aside a certain amount of GBPs to use to purchase property in Spain. Keep in mind that due to the foreign exchange rate, the number of pounds you saved may not equate to the number of Euros you need to purchase.
In 2015, the exchange rate changed 6% in just three months. In October, the exchange rated began at 1.35 €/£. The number then rose to 1.43 €/£ in November and dropped back to 1.35 €/£ by December’s end. A property that cost €300,000 in Spain would end up costing an extra €18,000 depending on the date of the sale and the fluctuation in exchange rates.
Such exchange rate changes can have an important impact on the price you ultimately pay when your money is in another currency.
Forex fluctuations are a necessary factor you must consider if you sign a contract to complete a sale within a timeframe of months. Because foreign exchange rates are constantly changing, you cannot know how much the euros will cost you at the time to complete. This is even more of a problem when purchasing off-plan or buying an under-construction property, because completion could be six months away or more. The larger time period invites larger currency fluctuations.
If you are buying a home that is to be resold by its original buyer, you may not be paying as much as you would for a new property, and the time to completion day is likely to be shorter, but the exchange rate can still cost you money in the long run.
A 10% deposit is generally paid at the time of signing the private sale contract. This contract is also known as “Contrato de Arras.”
Most buyers will have already purchased some euros to pay their deposit from their own bank. This is an expensive route, but most buyers don’t know any better.
The remaining 90% of the property price is due at the time of completion when the title deeds are signed before the Notary. Usually, the completion day is from 1 and 4 months after the private sale contract was signed. Because of the time frame, the buyer has a Euro liability for a few months. However, the changes in the exchange rate can still have a notable impact on the value of the other currencies, even throughout this relatively short period.
How can I manage the risk if high foreign exchange costs?
When you sign to buy Spanish property in and take on a Euro liability and your funds are in a different currency, it is essential to reduce your currency exchange rate risk.
Most people will get the remaining 90% of the required euros from their banks. But high street banks usually give the most unfavourable currency exchange rates. However, people will use banks out of habit and a lack of knowledge that they can get a much lower price with a specialist currency dealer or company.
How Can A Currency Dealer Help You Lower Your Risk of Spending too Much?
We advise purchasing foreign currency through a foreign currency dealer. While buying foreign currency from your local bank may be convenient, the benefits of purchasing through a dealer or broker far outweigh the small inconvenience. Listed below are several benefits of taking advantage of a currency dealer.
- Currency dealers ordinarily have the best rates
- They can lock you into an agreed rate
- They generally charge the lowest commissions
- Foreign currency dealers can provide advice on managing your risks
Are There Any Risks Associated with Currency Dealers?
Just like with anything in life, using a currency broker comes with its own risks. If your forex dealer were to go bankrupt while holding your money and is uninsured, you might lose the money. If you live in the UK, do your research and make sure a dealer is authorized, insured, and regulated by the Financial Conduct Authority.