Barclays

I want to buy a house abroad

Currency considerations of buying a house in another currency

Buying a property is probably the largest purchase you will ever make, and if you are planning to buy a property in another country (and currency) you will need to consider currency exchange rates.

There are a number of questions which you will need to bear in mind:

• What level of currency exchange rate risk are you prepared to take?
• What type of foreign exchange (FX) product should you use?
• How can you minimise exchange rate risk?

FX videos

View our online FX videos:

• The basics of foreign exchange
• I want to buy a house in another currency
• I want to make regular payments in a different currency
• I want to manage my overall FX exposure as I'm holding a lot of different currencies

Buying a house abroad: a case study¹ of Samuel

Samuel is currently living in the UK and buying a second home in Spain. In a few months he has to pay €100,000. He's looked at the sterling to euro exchange rate over the past 9 months, and seen it move from £1=1.22 euros to £1=£1.1 euros.

That means that the price of €100,000 was approximately €8,123.00 more expensive over those 9 months.

Today's spot rate is €1.11 (as at 4 May 2011). He could take a risk and wait in the hope that the exchange rate will move in his favour – but what if this doesn't happen? The other alternatives would be to carry out a spot transaction or a FX forward. Let's go through what these are and see what options they provide Samuel.

Spot transactions and FX forwards
The first thing Samuel needs to do is look at the history of how the two currencies have performed against each other and any volatility there has been in the past. Then he needs to look at the current forecasts and think about what might influence these. Forecasts can never be absolutely accurate due to external factors such as natural disasters or economic growth.

Samuel needs to think about his own personal risk tolerance. It's a question of either taking a risk that the rate improves and possibly losing money or otherwise buying some certainty. If he wants to buy some certainty there are two actions he could take right now to fix the price of the €100,000 - a spot transaction or FX forward.

The spot transaction would involve exchanging sterling to euros and placing the money in a euro account, at today's rate.

Any transaction three days or more in advance would be classed as a FX forward. If Samuel is waiting to get funds from a UK house sale he could go for a FX forward, where he uses today's FX forward exchange rate to buy currency at a specific date in the future (the FX forward rate will be different to today's spot rate). To set up the FX forward he would have to pay a deposit and arrange a forward foreign exchange facility.

The deposit is required simultaneously to the facility being set up. It needs to cover his exposure until the FX forward is settled. If the euro moved adversely against Samuel by more than 10% before the settlement date then he would have to provide more funds to keep his FX forward in place.

The following deposits are required for a FX forward transaction:

• 10 per cent of the facility is required for forward positions of 12 months or less for the major currency pairs i.e. euro to US dollar or pound sterling to euro etc.
• 25 per cent of the facility is required for forward positions between 12 and 24 months for major currency pairs.
• 25 per cent of the facility is required for minor or less common currency pairs i.e. US dollar to Czech koruna or pound sterling to South African Rand.

For more information in relation to this matter please contact us.

Instead of a fixed date forward, Samuel could use an option dated forward. With this Samuel is still obliged to go through with the transaction but can do this in between a window of two dates rather than on one specific date (e.g. two to six months). To find out more about forwards take a look at FX forwards.

Samuel contacts his Relationship Manager at Barclays International to discuss his options. His Relationship Manger then arranges a three way call with a Treasury Specialist. Based on all the information available, the risks involved and his own attitude towards risk he decides to go for a spot transaction as he already has the funds available.

Online demo View our online demo of Thomas who is also buying a property in another country.

Your next steps to FX transactions

So, like Samuel in our case study¹, you need to consider these points before making a decision on an event based currency exchange:

• What is the historical relationship of the two currencies?
• What is the current forecast?
• Are there risks of not taking action?
• What type of FX transaction would be best to carry out?

If you are not currently a Barclays International client, but are interested in our FX services you will first need to apply for our banking services, which you can do by calling +44 (0)1624 684498^† or accessing our online application by pressing the button below.

If you are an existing client and would like to find out more information please either contact your Relationship Manager, call us on +44 (0)1624 684498^† or complete a call back request form.

Please note: access to our Treasury Specialists is via a three-way conference call. Clients who do not have a Relationship Manager and require a call with a Treasury Specialist or want to conduct a FX forward should either:

• Hold assets of £50,000 with us, or
• Intend to transact a minimum £50k (or currency equivalent)