Is A Forward Contract Right For You?
A forward contract allows you to fix the current exchange rate for a future payment.
Paying for a property, product, or service in a foreign currency, is very different from buying in the UK and paying in pounds. The price quoted can change depending upon the exchange rate.
Due to lockdown and travel restrictions, overseas property completions can take longer, delays are very common and as a result, the rate can fluctuate even more than usual. Neil Poyton, Head of Private Dealing, shares his insights:
“When our customers begin the process of buying or selling property overseas, they use the current exchange rate to determine how much the property will cost them, or how much they expect to receive. This often plays a big part in their decision to proceed with the sale or purchase. The reality is that the rate that a customer often ends buying or selling at on completion, is usually very different from the rate they used when they made their original decision.
The reality is that the rate that a customer often ends buying or selling at on completion is usually very different from the rate they used when they made their original decision."
As a result, we are seeing more and more customers use forward contracts to minimise their risk. Securing the rate at the beginning of the process also gives them peace of mind, they know up front how much the property will cost, or how much they can expect to receive. We know a forward contract is not for everyone, but it is about making our customers aware of all the options they have available.”
To use a forward contract, you will need to pay a 10% deposit upfront. This is not a cost or charge. The full amount is transferred when the remaining 90% is paid. This also means that you can take advantage of the exchange rate without needing to have all the funds available.
Benefits of a forward contract:
You can take advantage of a favourable exchange rate.
You can protect yourself against exchange rate fluctuations.
You can secure the rate now and pay later (only a 10% deposit is needed upfront).
You can fix the rate for up to 2 years.
It is an ideal budgeting tool.
It is useful for off-plan property, amounts can be paid out over your plan.
If you have 10% available, you can still use a forward contract when selling a property.
What to use a forward contract for:
Property sale (if you have 10% available in advance).
Any future payments over £10,000.
Let’s see it in action
Mr and Mrs Johnson buy a €400,000 property in Portugal. They sign the contract on 25th February 2020 and complete it on 25th May 2020. The Johnsons had two options:
1. Buy using the rate on the day – total cost £355,117
A 10% property deposit of €40,000 is paid on 25th February 2020 at a rate of 1.1996 costing £33,344.
€360,000 is paid on completion 3 months later on 25th May 2020 at a rate of 1.1188 costing £321,773.
By paying on the dates agreed the total cost of the property would have been £355,117.
2. Secure the rate using a forward contract – total cost £333,444
On 25th February 2020, €400,000 is bought at a rate of 1.1996 using a forward contract costing £333,444.
A 10% forward contract deposit is needed to secure the rate, 90% is paid at the end of the contract when the euros are required.
If Mr and Mrs Johnson had used a forward contract at the beginning of the process on 25th February 2020, they could have saved £21,673.
Why a forward contract might not be right for you:
You are locked into the exchange rate regardless of any positive or negative exchange rate movements.
You do not have a 10% deposit available.
You would prefer to wait.
Forward contracts can protect your budget and protect you against potential losses due to movements in the exchange rate. If the rate moves in your favour you are locked into the previously agreed rate, however, if you are on a tight budget, it can give you peace of mind. Could you risk the property or your invoices costing you another £5,0000, £10,000, or £20,000 more?
Alternatively, you may decide to wait. Our team of experts will be able to proactively monitor the exchange rate on your behalf, or automatically buy should it hit a desired rate of exchange. We have a range of tools available to match your requirements.
Every customer's situation is different, speak to your dedicated account manager and together we can tailor the right solution for you.
Information brought to you by Spartan FX, Official Currency Partner to the KipperTree Property Portal.
Click here to contact them for further information and advice.